CYNOSURE INC - FORM 10-Q - November 6, 2015

CYNOSURE INC - FORM 10-Q - November 6, 2015

Attached files

Attached files

CYNOSURE INC Reports

file	filename
EX-31.1 - EX-31.1 - CYNOSURE INC	d86936dex311.htm
EX-32.1 - EX-32.1 - CYNOSURE INC	d86936dex321.htm
EX-31.2 - EX-31.2 - CYNOSURE INC	d86936dex312.htm
EX-32.2 - EX-32.2 - CYNOSURE INC	d86936dex322.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark one)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2015

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 000-51623

Cynosure, Inc.

(Exact name of registrant as specified in its charter)


Delaware		04-3125110
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

5 Carlisle Road Westford, MA		01886
(Address of principal executive offices)		(Zip code)

(978) 256-4200

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No

The number of shares outstanding of the registrant’s Class A common stock as of October 29, 2015:


Class		Number of Shares
Class A Common Stock, $0.001 par value		22,725,708

Cynosure, Inc.

Table of Contents


		Page No.
PART I.	Financial Information

Item 1.	Financial Statements
	Consolidated Balance Sheets as of September 30, 2015 and December 31, 2014		1
	Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2015 and 2014		2
	Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2015 and 2014		3
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2015 and 2014		4
	Notes to Consolidated Financial Statements		5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		13
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		24
Item 4.	Controls and Procedures		25

PART II.	Other Information
Item 1.	Legal Proceedings		25
Item 1A.	Risk Factors		26
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		37
Item 6.	Exhibits		37

SIGNATURES			39
EXHIBIT INDEX			40

EX-31.1 Section 302 Certification of Principal Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended

EX-31.2 Section 302 Certification of Principal Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended

EX-32.1 Certification of the Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

EX-32.2 Certification of the Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

EX-101 The following materials from the Cynosure, Inc. Quarterly Report on Form 10-Q for the quarter ended September 30, 2015, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Statements of Operations for the three and nine months ended September 30, 2015 and 2014, (ii) Consolidated Balance Sheets at September 30, 2015 and December 31, 2014, (iii) Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2015 and 2014, (iv) Consolidated Statements of Cash Flows for the nine months ended September 30, 2015 and 2014, and (v) Notes to Consolidated Financial Statements.

PART I — Financial Information

Item 1.

Financial Statements

Cynosure, Inc.

Consolidated Balance Sheets

(in thousands, except par value data)


	(Unaudited) September 30, 2015			December 31, 2014
Assets
Current assets:
Cash and cash equivalents	$	81,405		$	75,131
Short-term marketable securities		38,429			32,055
Accounts receivable, net		44,933			42,524
Inventories		74,310			59,318
Prepaid expenses and other current assets		14,495			9,629
Deferred income taxes		17,527			17,228

Total current assets		271,099			235,885

Property and equipment, net		38,461			34,256
Long-term marketable securities		33,420			26,189
Goodwill		105,794			105,764
Intangibles, net		46,668			53,583
Other assets		2,325			2,047

Total assets	$	497,767		$	457,724

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	22,114		$	20,856
Accrued expenses		40,706			42,426
Deferred revenue		16,140			10,971
Capital lease obligation		525			137

Total current liabilities		79,485			74,390
Capital lease obligation, net of current portion		17,068			16,088
Deferred revenue, net of current portion		847			809
Other noncurrent liability		10,495			8,325
Commitments and contingencies (Note 13)
Stockholders’ equity:
Preferred stock, $0.001 par value
Authorized — 5,000 shares
Issued — none		—			—
Class A and Class B common stock, $0.001 par value
Authorized — 70,000 shares
Issued — 24,222 Class A shares and no Class B shares at September 30, 2015
Issued — 23,253 Class A shares and no Class B shares at December 31, 2014		24			23
Additional paid-in capital		379,824			355,082
Retained earnings		48,553			39,974
Accumulated other comprehensive loss		(5,425	)		(3,863	)
Treasury stock, 1,628 Class A shares, at cost		(33,104	)		(33,104	)

Total stockholders’ equity		389,872			358,112

Total liabilities and stockholders’ equity	$	497,767		$	457,724

The accompanying notes are an integral part of these consolidated financial statements.

Cynosure, Inc.

Consolidated Statements of Operations

(Unaudited, in thousands, except per share data)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
Product revenues	$	64,644		$	55,672		$	190,575		$	164,969
Parts, accessories, service and royalty revenues		13,770			15,858			46,445			41,138

Total revenues		78,414			71,530			237,020			206,107
Cost of revenues		34,009			31,232			102,486			89,721

Gross profit		44,405			40,298			134,534			116,386
Operating expenses:
Sales and marketing		26,828			21,721			78,950			62,710
Research and development		5,514			5,746			16,723			16,319
Amortization of intangible assets acquired		736			740			2,208			2,166
General and administrative		6,492			6,841			22,124			22,197

Total operating expenses		39,570			35,048			120,005			103,392

Income from operations		4,835			5,250			14,529			12,994
Interest expense, net		(428	)		(342	)		(1,260	)		(1,034	)
Other expense, net		(216	)		(827	)		(1,395	)		(548	)

Income before provision for income taxes		4,191			4,081			11,874			11,412
Provision for income taxes		962			1,007			3,295			3,074

Net income	$	3,229		$	3,074		$	8,579		$	8,338

Basic net income per share	$	0.14		$	0.14		$	0.39		$	0.38

Diluted net income per share	$	0.14		$	0.14		$	0.38		$	0.37

Basic weighted-average common shares outstanding		22,580			21,637			22,167			21,900

Diluted weighted-average common shares outstanding		22,880			21,900			22,539			22,280

The accompanying notes are an integral part of these consolidated financial statements.

Cynosure, Inc.

Consolidated Statements of Comprehensive Income

(Unaudited, in thousands)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
Net income	$	3,229		$	3,074		$	8,579		$	8,338

Other comprehensive loss components:
Cumulative translation adjustment		(516	)		(1,429	)		(1,605	)		(1,249	)
Unrealized gain (loss) on marketable securities		37			(12	)		43			(16	)

Total other comprehensive loss		(479	)		(1,441	)		(1,562	)		(1,265	)

Comprehensive income	$	2,750		$	1,633		$	7,017		$	7,073

The accompanying notes are an integral part of these consolidated financial statements.

Cynosure, Inc.

Consolidated Statements of Cash Flows

(Unaudited, in thousands)


	Nine Months Ended September 30,
	2015			2014
Operating activities:
Net income	$	8,579		$	8,338
Reconciliation of net income to net cash provided by operating activities:
Depreciation and amortization		14,343			13,100
Stock-based compensation expense		5,683			5,320
Loss on disposal of fixed assets		15			67
Noncash interest expense on capital lease obligations		1,271			1,110
Noncash interest expense on license transfer agreement		148			—
Deferred income taxes		1,590			(127	)
Net accretion of marketable securities		1,609			1,134
Tax benefit from stock option exercises		(1,309	)		(3,033	)
Changes in operating assets and liabilities:
Accounts receivable		(3,391	)		(5,994	)
Inventories		(20,018	)		(6,325	)
Net book value of demonstration inventory sold		298			500
Prepaid expenses and other current assets		(3,889	)		759
Accounts payable		1,339			5,774
Accrued expenses		(1,345	)		(2,599	)
Deferred revenue		5,380			(63	)
Other noncurrent liability		(179	)		—

Net cash provided by operating activities		10,124			17,961
Investing activities:
Purchases of property and equipment		(8,101	)		(14,011	)
Proceeds from the sales and maturities of marketable securities		35,247			25,755
Purchases of marketable securities		(50,403	)		(50,712	)
Cash paid for acquisitions, net of cash received		—			(13,235	)
Increase in other noncurrent assets		(29	)		(89	)

Net cash used in investing activities		(23,286	)		(52,292	)
Financing activities:
Excess tax benefit on options exercised		1,309			3,033
Repurchases of common stock		—			(15,554	)
Proceeds from stock option exercises		17,745			7,629
Payments on capital lease obligation		(179	)		(602	)

Net cash provided by (used in) financing activities		18,875			(5,494	)
Effect of exchange rate changes on cash and cash equivalents		561			(76	)

Net increase (decrease) in cash and cash equivalents		6,274			(39,901	)
Cash and cash equivalents, beginning of the period		75,131			93,655

Cash and cash equivalents, end of the period	$	81,405		$	53,754

Supplemental cash flow information
Cash paid for interest	$	13		$	14

Cash paid for income taxes	$	2,915		$	1,827

Supplemental noncash investing and financing activities
Transfer of demonstration equipment from inventory to fixed assets	$	4,970		$	3,151

Assets acquired under capital lease	$	273		$	166

Net effect of acquisition-related opening balance sheet adjustments	$	143		$	—

The accompanying notes are an integral part of these consolidated financial statements.

Cynosure, Inc.

Notes to Consolidated Financial Statements (Unaudited)

Note 1 — Interim Consolidated Financial Statements

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) for interim information and pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) for reporting on Form 10-Q. Accordingly, certain information and footnote disclosures required for complete financial statements are not included herein. It is recommended that these financial statements be read in conjunction with the consolidated financial statements and related notes that appear in the Annual Report on Form 10-K of Cynosure, Inc. (Cynosure) for the year ended December 31, 2014. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the financial position, results of operations, and cash flows as of the dates and for the periods presented have been included. The results of operations for the nine months ended September 30, 2015 may not be indicative of the results that may be expected for the year ending December 31, 2015, or any other period.

Note 2 — Stock-Based Compensation

Cynosure recorded stock-based compensation expense of $1.9 million and $2.0 million for the three months ended September 30, 2015 and 2014, respectively. Cynosure recorded stock-based compensation expense of $5.7 million and $5.3 million for the nine months ended September 30, 2015 and 2014, respectively. As of September 30, 2015 and 2014, respectively, Cynosure had $29,000 and $25,000 of stock-based compensation expense capitalized as a part of inventory.

Total stock-based compensation expense was recorded to cost of revenues and operating expenses based upon the functional responsibilities of the individual holding the respective share-based payments, as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
	(in thousands)
Cost of revenues	$	96	$	79	$	244	$	219
Sales and marketing		541		519		1,511		1,481
Research and development		308		270		857		757
General and administrative		1,004		1,108		3,071		2,863

Total stock-based compensation expense	$	1,949	$	1,976	$	5,683	$	5,320

Cash received from option exercises was $17.7 million and $7.6 million during the nine months ended September 30, 2015 and 2014, respectively.

Cynosure granted options to purchase 452,499 and 849,680 shares of common stock during the nine months ended September 30, 2015 and 2014, respectively. Cynosure has elected to use the Black-Scholes model to determine the weighted average fair value of options. The weighted average fair value of the options granted during the nine months ended September 30, 2015 and 2014 was $12.40 and $10.51, respectively, using the following assumptions:


	Nine Months Ended September 30,
	2015	2014
Risk-free interest rate	1.39% - 1.72%	1.44% - 1.80%
Expected dividend yield	—	—
Expected term	4.8 years	4.6 years
Expected volatility	42% - 43%	43% - 44%
Estimated forfeiture rate	5%	5%

Option-pricing models require the input of various subjective assumptions, including the option’s expected life and the price volatility of the underlying stock. Cynosure’s estimated expected stock price volatility is based on its own historical volatility. Cynosure’s expected term of options represents the weighted average period of time that options granted are expected to be outstanding giving consideration to vesting schedules and Cynosure’s historical exercise patterns. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The dividend yield of zero is based on the fact that Cynosure has never paid cash dividends and has no present intention to pay cash dividends.

Cynosure granted 86,618 and 44,840 restricted stock units during the nine months ended September 30, 2015 and 2014, respectively, to employees at a fair market value of its common stock on the date of grant and which vest annually over a three-year period. Cynosure is recognizing related compensation expense, net of estimated forfeitures, on a straight-line basis over the three-year period.

Cynosure granted 16,685 and 43,500 restricted stock units during the nine months ended September 30, 2015 and 2014, respectively, to non-employee directors at a fair market value of its common stock on the date of grant and which vest quarterly over a one-year period. Cynosure is recognizing related compensation expense, net of estimated forfeitures, on a straight-line basis over the one-year period.

Note 3 — Inventories

Cynosure states all inventories at the lower of cost or market, determined on a first-in, first-out method. Inventory includes material, labor and overhead and consists of the following:


	September 30, 2015		December 31, 2014
	(in thousands)
Raw materials	$	21,032	$	16,875
Work in process		3,522		3,526
Finished goods		49,756		38,917

	$	74,310	$	59,318

Note 4 — Fair Value

U.S. GAAP establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes the following fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value:

•

Level 1 — Quoted prices in active markets for identical assets or liabilities.

•

Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable markets data for substantially the full term of the assets or liabilities.

•

Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The following table represents Cynosure’s fair value hierarchy for its financial assets (cash equivalents and marketable securities) measured at fair value as of September 30, 2015 (in thousands):


	Level 1		Level 2		Level 3		Total
Money market funds (1)	$	5,801	$	—	$	—	$	5,801
Treasuries and government agencies (2)		—		14,523		—		14,523
State and municipal bonds		—		59,826		—		59,826

Total	$	5,801	$	74,349	$	—	$	80,150

The following table represents Cynosure’s fair value hierarchy for its financial assets (cash equivalents and marketable securities) measured at fair value as of December 31, 2014 (in thousands):


	Level 1		Level 2		Level 3		Total
Money market funds (1)	$	1,753	$	—	$	—	$	1,753
State and municipal bonds		—		47,744		—		47,744
Treasuries and government agencies		—		8,486		—		8,486
Corporate obligations and commercial paper		—		2,001		—		2,001
Equity securities		13		—		—		13

Total	$	1,766	$	58,231	$	—	$	59,997

(1)	Included in cash and cash equivalents at September 30, 2015 and December 31, 2014.

(2)	$2.5 million included in cash and cash equivalents at September 30, 2015.

During the nine months ended September 30, 2015, there were no significant transfers in and out of Level 1 and Level 2. Cynosure did not have any Level 3 financial assets at September 30, 2015 or December 31, 2014.

Note 5 — Short and Long-Term Marketable Securities

Cynosure’s available-for-sale securities at September 30, 2015 consist of approximately $74.3 million of investments in debt securities consisting of state and municipal bonds, treasuries and government agencies. All investments in available-for-sale securities are recorded at fair market value, with any unrealized gains and losses reported as a separate component of accumulated other comprehensive loss. As of September 30, 2015, Cynosure’s marketable securities consist of the following (in thousands):


	Market Value		Amortized Cost		Unrealized Gains		Unrealized Losses
*Available-for-Sale Securities:*
Cash equivalents:
Treasuries and government agencies	$	2,500	$	2,500	$	—	$	—

Total cash equivalents	$	2,500	$	2,500	$	—	$	—

Short-term marketable securities:
State and municipal bonds	$	36,929	$	36,912	$	17	$	—
Treasuries and government agencies		1,500		1,500		—		—

Total short-term marketable securities	$	38,429	$	38,412	$	17	$	—

Long-term marketable securities:
State and municipal bonds	$	22,897	$	22,873	$	26	$	(2	)
Treasuries and government agencies		10,523		10,515		8		—

Total long-term marketable securities	$	33,420	$	33,388	$	34	$	(2	)

Total available-for-sale securities	$	74,349	$	74,300	$	51	$	(2	)

Total marketable securities	$	71,849

As of December 31, 2014, Cynosure’s marketable securities consist of the following (in thousands):


	Market Value		Amortized Cost		Unrealized Gains		Unrealized Losses
*Available-for-Sale Securities:*
Short-term marketable securities:
State and municipal bonds	$	26,041	$	26,033	$	8	$	—
Treasuries and government agencies		4,000		4,000		—		—
Corporate obligations and commercial paper		2,001		2,001		—		—
Equity securities		13		18		—		(5	)

Total short-term marketable securities	$	32,055	$	32,052	$	8	$	(5	)


	Market Value		Amortized Cost		Unrealized Gains		Unrealized Losses
Long-term marketable securities:
State and municipal bonds	$	21,703	$	21,721	$	2	$	(20	)
Corporate obligations and commercial paper		4,486		4,500		—		(14	)

Total long-term marketable securities	$	26,189	$	26,221	$	2	$	(34	)

Total available-for-sale securities	$	58,244	$	58,273	$	10	$	(39	)

Total marketable securities	$	58,244

As of September 30, 2015, Cynosure’s available-for-sale debt securities mature as follows (in thousands):


	Total		Maturities
	Total		Less Than One Year		One to Five Years		More than Five Years
State and municipal bonds	$	59,826	$	36,929	$	22,897	$	—
Treasuries and government agencies		14,523		4,000		10,523		—

Total available-for-sale debt securities	$	74,349	$	40,929	$	33,420	$	—

Note 6 — Acquisitions

Ellman International, Inc.

On September 5, 2014, Cynosure acquired substantially all of the assets of Ellman International, Inc. (Ellman) for $13.2 million in cash. In addition, Cynosure assumed current liabilities associated with normal working capital and certain contractual liabilities. The purchase price was based primarily on the net working capital on the date of purchase plus an amount to retire all of Ellman’s long term debt on the date of sale. Cynosure also assumed a license transfer agreement as part of the purchase valued at $4.2 million. The acquisition complements Cynosure’s aesthetic treatment platform with radiofrequency energy sources and accessory products. The acquisition of substantially all of the assets of Ellman was considered a business acquisition for accounting purposes.

Cynosure has assessed the fair value of the assets acquired and liabilities assumed. Pro forma financial information was filed with the SEC within the applicable time period. Cynosure has allocated the purchase price to the net tangible and intangible assets based on their estimated fair values as of September 5, 2014. During the nine months ended September 30, 2015, Cynosure completed its purchase accounting estimates of the assets acquired and liabilities assumed in connection with the acquisition of the assets of Ellman, and as a result, increased goodwill from $6.6 million at December 31, 2014 to $6.7 million at September 30, 2015, with the offsetting decrease to inventory.

The following table summarizes the estimated fair value as of September 5, 2014 of the net assets acquired (in thousands):


Purchase price:
Cash paid	$	13,235

Total	$	13,235

Assets (liabilities) acquired:
Accounts receivable	$	2,144
Inventory		3,542
Prepaid expenses and other assets		488
Property and equipment		612
Intangible assets		6,800
Goodwill		6,741
Accounts payable		(9	)
Accrued expenses		(2,469	)
Deferred revenue		(454	)
Other noncurrent liability		(4,160	)

Total	$	13,235

Note 7 — Goodwill and Other Intangible Assets

Changes to goodwill during the nine months ended September 30, 2015 were as follows (in thousands):


Balance – December 31, 2014	$	105,764
Ellman acquisition		143
Translation adjustment		(113	)

Balance – September 30, 2015	$	105,794

Other intangible assets consisted of the following at September 30, 2015 and December 31, 2014 (in thousands):


	Developed Technology & Patents			Business Licenses			Customer Relationships			Trade Names			Other			Total
September 30, 2015
Cost	$	29,240		$	384		$	19,718		$	18,390		$	1,353		$	69,085
Translation adjustment		—			—			(39	)		—			—			(39	)
Accumulated amortization		(12,500	)		(229	)		(7,300	)		(2,290	)		(59	)		(22,378	)

Balance, September 30, 2015	$	16,740		$	155		$	12,379		$	16,100		$	1,294		$	46,668

December 31, 2014
Cost	$	29,240		$	384		$	19,718		$	18,390		$	1,338		$	69,070
Translation adjustment		—			34			2			—			2			38
Accumulated amortization		(7,840	)		(252	)		(5,818	)		(1,607	)		(8	)		(15,525	)

Balance, December 31, 2014	$	21,400		$	166		$	13,902		$	16,783		$	1,332		$	53,583

Amortization expense related to developed technology and patents is classified as a component of cost of revenues. Amortization expense related to customer relationships and trade names is classified as a component of amortization of intangible assets acquired. Amortization expense related to business licenses and other is classified as a component of general and administrative expenses.

Amortization expense for the three months ended September 30, 2015 and 2014 was $2.3 million and $2.2 million, respectively. Amortization expense for the nine months ended September 30, 2015 and 2014 was $6.9 million and $6.4 million, respectively. Cynosure has approximately $1.0 million of indefinite-life intangible assets that are included in other intangible assets in the table above. As of September 30, 2015, amortization expense on existing intangible assets for the next five years and beyond is as follows (in thousands):


Remainder of 2015	$	2,305
2016		8,431
2017		6,441
2018		4,925
2019		3,189
2020 and thereafter		20,401

Total	$	45,692

Note 8 — Warranty Costs

Cynosure typically provides a one-year parts and labor warranty on end-user sales of equipment. Distributor sales generally include a one-year warranty on parts only. Estimated future costs for initial product warranties are provided for at the time of revenue recognition and charged to cost of goods sold. The following table provides the detail of the change in Cynosure’s product warranty accrual during the nine months ended September 30, 2015, which is a component of accrued expenses in the consolidated balance sheets (in thousands):


Balance – December 31, 2014	$	8,118
Warranty provision related to new sales		9,570
Costs incurred		(9,785	)

Balance – September 30, 2015	$	7,903

Note 9 — Segment Information

In accordance with Accounting Standards Codification (ASC) 280, Segment Reporting Topic, operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision-making group, in making decisions how to allocate resources and assess performance. Cynosure’s chief decision-maker, as defined under ASC 280, is a combination of the Chief Executive Officer and the Chief Financial Officer. Cynosure views its operations and manages its business as one segment, aesthetic treatment products and services.

The following table represents total revenue by geographic area:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
	(in thousands)
United States	$	47,341	$	39,734	$	136,988	$	100,404
Europe		8,470		10,207		29,572		35,830
Asia / Pacific		16,217		15,131		51,175		47,857
Other		6,386		6,458		19,285		22,016

Total	$	78,414	$	71,530	$	237,020	$	206,107

Total assets by geographic area are as follows:


	September 30, 2015			December 31, 2014
	(in thousands)
United States	$	462,585		$	420,513
Europe		21,526			23,235
Asia / Pacific		19,247			19,182
Eliminations		(5,591	)		(5,206	)

Total	$	497,767		$	457,724

Long-lived assets (property and equipment only) by geographic area are as follows:


	September 30, 2015		December 31, 2014
	(in thousands)
United States	$	34,134	$	30,912
Europe		1,540		1,656
Asia / Pacific		2,787		1,688

Total	$	38,461	$	34,256

No individual country within Europe or Asia/Pacific represented greater than 10% of total revenue, assets or long-lived assets for any period presented.

Note 10 — Net Income Per Common Share

Basic net income per share is determined by dividing net income by the weighted average common shares outstanding during the period. Diluted net income per share is determined by dividing net income by the diluted weighted average shares outstanding during the period. Diluted weighted average shares reflect the dilutive effect, if any, of common stock options and restricted stock units based on the treasury stock method.

A reconciliation of basic and diluted shares is as follows (in thousands, except per share data):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
Net income	$	3,229	$	3,074	$	8,579	$	8,338

Basic weighted average common shares outstanding		22,580		21,637		22,167		21,900
Weighted average common equivalent shares		300		263		372		380

Diluted weighted average common shares outstanding		22,880		21,900		22,539		22,280

Basic net income per share	$	0.14	$	0.14	$	0.39	$	0.38

Diluted net income per share	$	0.14	$	0.14	$	0.38	$	0.37

For the three and nine months ended September 30, 2015, approximately 0.5 million and 1.1 million weighted average shares subject to stock options and restricted stock units, respectively, were excluded from the calculation of diluted weighted average common shares outstanding as their effect was antidilutive.

For the three and nine months ended September 30, 2014, approximately 1.7 million and 1.5 million weighted average shares subject to stock options and restricted stock units, respectively, were excluded from the calculation of diluted weighted average common shares outstanding as their effect was antidilutive.

Note 11 — Accumulated Other Comprehensive Loss

Changes to accumulated other comprehensive loss during the nine months ended September 30, 2015 were as follows (in thousands):


	Unrealized Gain on Marketable Securities, net of taxes			Translation Adjustment			Accumulated Other Comprehensive Loss
Balance — December 31, 2014	$	(10	)	$	(3,853	)	$	(3,863	)
Current period other comprehensive loss		43			(1,605	)		(1,562	)

Balance — September 30, 2015	$	33		$	(5,458	)	$	(5,425	)

Note 12 — Income Taxes

During the three and nine months ended September 30, 2015, Cynosure recorded an income tax provision of $1.0 million and $3.3 million, respectively, representing an effective tax rate of 23% and 28%, respectively. The income tax provision for the three and nine months ended September 30, 2015 was primarily attributable to applying Cynosure’s estimated annual effective tax rate to its year-to-date consolidated income before provision for income taxes. The estimated annual effective tax rate is favorably impacted by the jurisdictional mix of worldwide earnings and the domestic manufacturing deduction, and unfavorably impacted by non-deductible expenses. The difference between the U.S. federal statutory tax rate and the effective tax rate was primarily attributable to a discrete tax benefit of $0.5 million for the release of valuation allowance previously maintained against the net deferred tax assets of Palomar Japan K.K., that was recorded in the second quarter of 2015, as well as a discrete tax benefit of $0.5 million that was principally due to an increase in 2014 federal and state research credits that was recorded in the third quarter of 2015.

During the three and nine months ended September 30, 2014, Cynosure recorded an income tax provision of $1.0 million and $3.1 million, respectively, representing an effective tax rate of 25% and 27%, respectively. The income tax provision for the three and

nine months ended September 30, 2014 was primarily attributable to applying Cynosure’s estimated annual effective tax rate to its year-to-date consolidated income before provision for income taxes. The difference between the U.S. federal statutory tax rate and the effective tax rate was primarily attributable to a discrete tax benefit of $0.3 million for the release of the valuation allowance previously maintained against the net deferred tax assets of Cynosure Spain S.L. that was recognized in the second quarter of 2014. Other factors resulting in differences between the U.S. federal statutory tax rate and the effective tax rate are the jurisdictional mix of worldwide earnings, non-deductible expenses and the domestic manufacturing deduction.

At September 30, 2015 and December 31, 2014, Cynosure had gross tax-effected unrecognized tax benefits of $0.8 million of which the entire amount, if recognized, would favorably impact the effective tax rate. Cynosure classifies interest and penalties related to income taxes as a component of its provision for income taxes. Cynosure does not expect any material changes in the amounts of unrecognized tax benefits over the next 12 months.

Cynosure files income tax returns in the U.S. federal jurisdiction, and in various state and foreign jurisdictions. Cynosure is no longer subject to U.S. federal income tax examinations by tax authorities for years before 2012. With few exceptions, Cynosure is no longer subject to U.S. state tax examinations for years before 2011. Additionally, certain non-U.S. jurisdictions are no longer subject to income tax examinations by tax authorities for years before 2010.

Note 13 — Commitments and Contingencies

Lease Commitments

Cynosure leases the land portion of its U.S. operating facility and certain foreign facilities under non-cancellable operating lease agreements expiring through May 2027. These leases are non-cancellable and typically contain renewal options. Certain leases contain rent escalation clauses for which Cynosure recognizes the expense on a straight-line basis. Rent expense for the three and nine months ended September 30, 2015 was approximately $0.5 million and $1.5 million, respectively. Rent expense for the three and nine months ended September 30, 2014 was approximately $0.6 million and $2.5 million, respectively. The 2014 period rent expense includes rent expense incurred on the former Palomar Medical Technologies, Inc. headquarters, which Cynosure occupied through July 2014.

Cynosure leases the buildings portion of its U.S. operating facility and certain equipment and vehicles under capital lease agreements with payments due through May 2027. Commitments under Cynosure’s lease arrangements are as follows as of September 30, 2015 (in thousands):


	Operating Leases		Capital Leases
Remainder of 2015	$	467	$	45
2016		1,823		2,355
2017		1,818		2,749
2018		1,774		2,650
2019		1,375		2,629
2020 and thereafter		2,844		20,958

Total minimum lease payments	$	10,101	$	31,386

Less amount representing interest				(13,793	)

Present value of obligations under capital leases			$	17,593
Current portion of capital lease obligations				525

Capital lease obligations, net of current portion			$	17,068

Contractual Obligations

Cynosure’s significant outstanding contractual obligations relate to its capital leases from its facilities leases, including the buildings portion of its U.S. operating facility, and equipment financings. Cynosure’s leases are non-cancellable and typically contain renewal options. Certain leases contain rent escalation clauses for which Cynosure recognizes the expense on a straight-line basis. Cynosure has summarized in the table below its fixed contractual cash obligations as of September 30, 2015.


	Total		Less Than One Year		One to Three Years		Three to Five Years		More than Five Years
	(in thousands)
Capital lease obligations, including interest	$	31,386	$	1,811	$	5,325	$	5,259	$	18,991
Operating leases		10,101		1,834		3,605		2,334		2,328

Total contractual obligations	$	41,487	$	3,645	$	8,930	$	7,593	$	21,319

Contingencies

Cynosure continually assesses litigation to determine if an unfavorable outcome would lead to a probable loss or reasonably possible loss, which could be estimated. In accordance with the Financial Accounting Standards Board’s guidance on accounting for contingencies, Cynosure accrues for all direct costs associated with the estimated resolution of contingencies at the earliest date at which it is deemed probable that a liability has been incurred and the amount of such liability can be reasonably estimated. If the estimate of a probable loss is a range and no amount within the range is more likely, Cynosure accrues the minimum amount of the range. In cases where Cynosure believes that a reasonably possible loss exists, Cynosure discloses the facts and circumstances of the litigation, including an estimable range, if possible. In management’s opinion, Cynosure is not currently involved in any legal proceedings, which, individually or in the aggregate, could have a material effect on Cynosure’s financial statements. Cynosure believes that contingent losses associated with any current litigation were remote as of September 30, 2015 and at the time of the filing of this Quarterly Report on Form 10-Q, and as such, Cynosure has not recorded or disclosed any material loss contingencies.

Note 14 — Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board issued guidance codified in ASC 606, Revenue Recognition — Revenue from Contracts with Customers, which amends the guidance in ASC 605, Revenue Recognition. This new revenue standard creates a single source of revenue guidance for all companies in all industries and is more principles-based than the current revenue guidance. The new guidance must be adopted using either a full retrospective approach for all periods presented in the period of adoption or a modified retrospective approach. ASC 606 was originally scheduled to be effective for interim and annual periods beginning after December 15, 2016. In August 2015, the Financial Accounting Standards Board deferred the effective date for ASC 606. The standard will be effective for public entities for interim and annual reporting periods beginning after December 15, 2017. Cynosure is currently evaluating the impact of the provisions of ASC 606.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This Quarterly Report on Form 10-Q, which we refer to as this Quarterly Report, contains forward-looking statements that involve substantial risks and uncertainties. All statements, other than statements of historical facts, included in this Quarterly Report regarding our strategy, future operations, future financial position, future revenues, projected costs, prospects, plans, objectives of management and expected market growth are forward-looking statements. The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “will,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. These forward-looking statements include, among other things, statements about:

•

our ability to identify and penetrate new markets for our products and technology;

•

our strategy of growing through acquisitions;

•

our ability to innovate, develop and commercialize new products;

•

our ability to obtain and maintain regulatory clearances;

•

our sales and marketing capabilities and strategy in the United States and internationally;

•

our intellectual property portfolio; and

•

our estimates regarding expenses, future revenues, capital requirements and needs for additional financing.

We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements included in this Quarterly Report, particularly in Part II, Item 1A of this Quarterly Report, and in our other public filings with the Securities and Exchange Commission, or the SEC, that could cause actual results or events to differ materially from the forward-looking statements that we make.

You should read this Quarterly Report and the documents that we have filed as exhibits to the Quarterly Report completely and with the understanding that our actual future results may be materially different from what we expect. It is routine for internal projections and expectations to change as the year or each quarter in the year progresses, and therefore it should be clearly understood that the internal projections and beliefs upon which we base our expectations are made as of the date of this Quarterly Report and may change prior to the end of each quarter or the year. While we may elect to update forward-looking statements at some point in the future, we do not undertake any obligation to update any forward-looking statements whether as a result of new information, future events or otherwise, except as required by law.

The following discussion should be read in conjunction with, and is qualified in its entirety by, the consolidated financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report and the consolidated financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K filed with the SEC on March 13, 2015. Historical results and percentage relationships among any amounts in the financial statements are not necessarily indicative of trends in operating results for any future periods.

Company Overview

We develop, manufacture, and market aesthetic treatment systems that enable plastic surgeons, dermatologists and other medical practitioners to perform non-invasive and minimally invasive procedures to remove hair, treat vascular and benign pigmented lesions, remove multi-colored tattoos, revitalize the skin, liquefy and remove unwanted fat through laser lipolysis, reduce cellulite, clear nails infected by toe funguses, ablate sweat glands and improve vaginal health. We also market radiofrequency, or RF, energy-sourced medical devices for precision surgical applications such as facial plastic and general surgery, gynecology, ear, nose, and throat procedures, ophthalmology, oral and maxillofacial surgery, podiatry and proctology.

Our product portfolio is composed of a broad range of energy sources including Alexandrite, diode, Nd:YAG, pulse dye, Q-switched lasers, intense pulsed light and RF technology. We sell our products globally under the Cynosure, Palomar, ConBio and Ellman brand names through a direct sales force in the United States, Canada, Mexico, France, Morocco, Germany, Spain, the United Kingdom, Australia, China, Japan and Korea, and through international distributors in approximately 120 other countries.

We focus our development and marketing efforts on offering leading, or flagship, products for the following high volume applications:

•

our Elite product line for hair removal and treatment of facial and leg veins and pigmentations;

•

our SmartLipo product line for LaserBodySculpting for the removal of unwanted fat;

•

our Cellulaze product line for the treatment of cellulite;

•

our SmartSkin product line for anti-aging applications, including treatments for wrinkles, skin texture, skin discoloration and skin tightening;

•

our Cynergy product line for the treatment of vascular lesions;

•

our Accolade, MedLite C6 and RevLite product lines for the removal of benign pigmented lesions, as well as multi-colored tattoos;

•

our PicoSure product line for the treatment of tattoos, benign pigmented lesions, acne scars, fine lines and wrinkles;

•

our Icon Aesthetic System for hair removal, wrinkle reduction and scar and stretch mark treatment;

•

our Vectus diode laser for high volume hair removal;

•

our MonaLisa Touch laser for the treatment of vaginal health; and

•

our SculpSure hyperthermic laser treatment for non-invasive fat reduction.

On September 5, 2014, we acquired substantially all of the assets of Ellman International, Inc., or Ellman, for $13.2 million in cash. In addition, we assumed certain of its contractual and current liabilities.

The Ellman acquisition complements our platform with RF energy sources and accessory products for aesthetic and surgical indications. Ellman’s product line encompasses multiple RF generators and single-use electrodes for aesthetic and multi-specialty surgical indications such as facial plastic and general surgery, gynecology, ear, nose and throat procedures, ophthalmology, oral and

maxillofacial surgery, podiatry and proctology. Ellman’s proprietary high frequency, low-temperature RF technology is optimized for achieving surgical precision and controlled hemostasis. The main products which have been added to our portfolio as a result of the acquisition include:

•

the Surgitron^® radiowave platform technology line of RF surgical generators;

•

the Pelleve^® wrinkle reduction system for skin tightening and non-ablative skin rejuvenation; and

•

the PelleFirm™ RF body treatment system for skin tightening and reduction in the appearance of cellulite.

A key element of our business strategy is to launch innovative new products and technologies into high-growth aesthetic applications. Our research and development team builds on our existing broad range of laser, light-based technologies and other energies to develop new solutions and products to target unmet needs in significant aesthetic treatment markets. Innovation continues to be a strong contributor to our growth.

We have developed SculpSure, a hyperthermic laser treatment for non-invasive lipolysis of the flanks and abdomen. SculpSure is designed to reduce fat non-invasively by disrupting subcutaneous fat cells. In May 2015, we received U.S. Food and Drug Administration, or FDA, clearance to market SculpSure for non-invasive lipolysis of the flanks. In July 2015, we received an expanded FDA clearance to market SculpSure for non-invasive lipolysis of the abdomen. In September 2015, we received European Medical Device Directive certification from the European Notified Body for SculpSure allowing the “CE” Mark to be placed on the device for distribution in the European Union and its member states. We began shipping SculpSure in September 2015 through a U.S. direct sales force.

In November 2014, we signed an exclusive agreement with El.En. S.p.A., or El.En., to market and distribute in North America the MonaLisa Touch, a carbon dioxide laser for the treatment of vaginal health. We launched the product in the United States in the first quarter of 2015. In October 2015, we received a medical device license from Health Canada to market MonaLisa Touch within Canada for the treatment of symptoms related to Genitourinary Syndrome of Menopause.

In March 2013, we commenced commercialization of our PicoSure system, our picosecond laser technology platform for the treatment of tattoos and benign pigmented lesions. The PicoSure system is the first commercially available picosecond Alexandrite aesthetic laser platform. Picosecond lasers deliver pulses that are measured in trillionths of a second, in contrast with nanosecond technology, such as our MedLite^® and RevLite™ products, which deliver pulses in billionths of a second. We received FDA clearance to market the PicoSure laser in November 2012. In October 2013, we launched the PicoSure FOCUS Lens Array which microscopically concentrates the PicoSure laser pulse to a precise depth and exposes less than 10% of the skin to areas of high fluence while the surrounding skin is exposed to a low background fluence. We received marketing authorization for our PicoSure system in Canada in July 2013, in Australia in November 2013, and in Korea and Taiwan in January 2014. In July 2014, we received FDA clearance to market PicoSure for the treatment of acne scars. In September 2014, we received FDA clearance to market PicoSure with PicoSure FOCUS Lens Array for the treatment of wrinkles. In February 2015, we received FDA clearance to market the 532 nm wavelength for PicoSure designed to more effectively treat red, yellow and orange tattoo ink colors, which we offer as an upgrade to our current PicoSure customer base. In September 2015, we received Chinese Food and Drug Administration approval to market the PicoSure 755nm wavelength for tattoo removal.

Revenues

We generate revenues primarily from sales of our products and parts and accessories and from services, including product warranty revenues, and royalty payments received from our licensees. During the nine months ended September 30, 2015, we derived approximately 80% of our revenues from sales of our products and 20% of our revenues from sales of parts, accessories, service and royalty revenues. During the nine months ended September 30, 2014, we derived approximately 80% of our revenues from sales of our products and 20% of our revenues from sales of parts, accessories, service and royalty revenues. Generally, we recognize revenues from the sales of our products upon delivery to our customers, revenues from service contracts and extended product warranties ratably over the coverage period and revenues from service in the period in which the service occurs.

We recognize royalty revenues when we can reliably estimate such amounts and collectability is reasonably assured. As such, we recognize royalty revenues in the quarter reported to us by our licensees, which is generally one quarter following the quarter in which sales by our licensees occurred. Royalty revenues also include amounts due from settlements with licensees for back-owed royalties from prior periods. These settlement amounts are considered revenue, when collectability is reasonably assured, because they constitute our ongoing major or central operations.

In December 2013, we completed a comprehensive settlement agreement with Tria Beauty, Inc., or Tria, which ended the patent infringement litigation between Tria and Palomar Medical Technologies Inc., or Palomar. Under the agreement, we were entitled to receive $10.0 million plus future royalty payments. We paid approximately $2.0 million of this revenue to Massachusetts General

Hospital, or MGH, under an exclusive license agreement between Palomar and MGH, which was recorded as cost of revenues within our consolidated statement of operations. We recognized the final $3.0 million of this revenue in March 2015, which is recorded as royalty revenues within our consolidated statement of operations.

We sell our products globally under the Cynosure, Palomar, ConBio and Ellman brand names through a direct sales force in the United States, Canada, Mexico, France, Morocco, Germany, Spain, the United Kingdom, Australia, China, Japan and Korea, and use distributors to sell our products in other countries where we do not have a direct presence. During the nine months ended September 30, 2015 and 2014, we derived 40% and 49% of our revenues, respectively, from sales outside North America. As of September 30, 2015, we had 135 sales employees covering North America and 61 sales employees in France, Morocco, Germany, Spain, the United Kingdom, Australia, China, Japan and Korea. We utilize a global distribution network covering approximately 120 countries.

The following table provides revenue data by geographical region for the nine months ended September 30, 2015 and 2014:


	Percentage of Revenues
	Nine Months Ended September 30,
Region	2015			2014
North America		60	%		51	%
Europe		12			17
Asia/Pacific		22			23
Other		6			9

Total		100	%		100	%

See Note 9 to our consolidated financial statements included in this Quarterly Report for revenues and asset data by geographic region.

Results of Operations

THREE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014

The following table contains selected statement of operations data, which serve as the basis of the discussion of our results of operations for the three months ended September 30, 2015 and 2014, respectively (in thousands, except for percentages):


	Three Months Ended September 30,												$ Change			% Change
	2015						2014
	Amount			As a % of Total Revenues			Amount			As a % of Total Revenues
Product revenues	$	64,644			82	%	$	55,672			78	%	$	8,972			16	%
Parts, accessories, service and royalty revenues		13,770			18			15,858			22			(2,088	)		(13	)

Total revenues		78,414			100			71,530			100			6,884			10
Cost of revenues		34,009			43			31,232			44			2,777			9

Gross profit		44,405			57			40,298			56			4,107			10
Operating expenses
Sales and marketing		26,828			34			21,721			30			5,107			24
Research and development		5,514			7			5,746			8			(232	)		(4	)
Amortization of intangible assets acquired		736			1			740			1			(4	)		(1	)
General and administrative		6,492			9			6,841			10			(349	)		(5	)

Total operating expenses		39,570			51			35,048			49			4,522			13

Income from operations		4,835			6			5,250			7			(415	)		(8	)
Interest expense, net		(428	)		(1	)		(342	)		—			(86	)		(25	)
Other expense, net		(216	)		—			(827	)		(1	)		611			74

Income before provision for income taxes		4,191			5			4,081			6			110			3
Provision for income taxes		962			1			1,007			2			(45	)		(4	)

Net income	$	3,229			4	%	$	3,074			4	%	$	155			5	%

Revenues

Total revenues for the three months ended September 30, 2015 increased by $6.9 million, or 10%, to $78.4 million, as compared to revenues of $71.5 million for the three months ended September 30, 2014 (in thousands, except for percentages):


	Three Months Ended September 30,				$ Change			% Change
	2015		2014		$ Change			% Change
Product sales in North America	$	40,805	$	31,649	$	9,156			29	%
Product sales outside North America		23,839		24,023		(184	)		(1	)
Global parts, accessories, service and royalty sales		13,770		15,858		(2,088	)		(13	)

Total revenues	$	78,414	$	71,530	$	6,884			10	%

The increase in total revenues was attributable to a number of factors:

•

Revenues from the sales of our products in North America increased by approximately $9.2 million, or 29%, from the 2014 period primarily due to strong sales of PicoSure, Icon and MonaLisa Touch along with a full quarter of sales in the 2015 period attributable to products acquired from Ellman.

•

Revenues from the sales of our products outside of North America decreased by approximately $0.2 million, or 1%, from the 2014 period primarily due to unfavorable exchange rates affecting our European subsidiaries and the number of units sold to our European and Latin American distributors.

•

Revenues from the sales of parts, accessories, services and royalties decreased by approximately $2.1 million, or 13%, from the 2014 period, primarily due to a $3.0 million settlement payment received from Tria during the 2014 period. This was partially offset by a full quarter of accessories revenues attributable to products acquired from Ellman.

Cost of Revenues


	Three Months Ended September 30,						$ Change		% Change
	2015			2014			$ Change		% Change
Cost of revenues (dollars in thousands)	$	34,009		$	31,232		$	2,777		9	%
Cost of revenues (as a percentage of total revenues)		43	%		44	%

Total cost of revenues increased $2.8 million, or 9%, to $34.0 million for the 2015 period, as compared to $31.2 million for the 2014 period. The increase was primarily associated with our 10% increase in total revenues in the 2015 period compared to the 2014 period. Our total cost of revenues for the 2015 period decreased as a percentage of total revenues as compared to the 2014 period, resulting in a gross margin percentage of 57% for the 2015 period as compared to 56% for the 2014 period, primarily due to a higher percentage of laser revenue from our North American distribution, where average selling prices tend to be higher.

Sales and Marketing


	Three Months Ended September 30,						$ Change		% Change
	2015			2014			$ Change		% Change
Sales and marketing (dollars in thousands)	$	26,828		$	21,721		$	5,107		24	%
Sales and marketing (as a percentage of total revenues)		34	%		30	%

Sales and marketing expenses increased $5.1 million, or 24%, for the 2015 period, to $26.8 million as compared to $21.7 million for the 2014 period. The increase was primarily due to increases in the number of our sales employees, an increase in commission expense due to increased product revenues and the addition of sales and marketing costs associated with the launch of SculpSure in the 2015 period. Our total sales and marketing expenses for the 2015 period increased as a percentage of total revenues as compared to the 2014 period due primarily to the additional sales and marketing costs associated with the launch of SculpSure.

Research and Development


	Three Months Ended September 30,						$ Change			% Change
	2015			2014			$ Change			% Change
Research and development (dollars in thousands)	$	5,514		$	5,746		$	(232	)		(4	)%
Research and development (as a percentage of total revenues)		7	%		8	%

Research and development expenses decreased $0.2 million, or 4%, for the 2015 period, to $5.5 million compared to $5.7 million for the 2014 period. Our total research and development expenses as a percentage of total revenues decreased for the 2015 period compared to the 2014 period due to improved operating leverage.

Amortization of Intangible Assets Acquired


	Three Months Ended September 30,						$ Change			% Change
	2015			2014			$ Change			% Change
Amortization of intangible assets acquired (dollars in thousands)	$	736		$	740		$	(4	)		(1	)%
Amortization of intangible assets acquired (as a percentage of total revenues)		1	%		1	%

Amortization of intangible assets acquired decreased $4,000, or 1%, for the 2015 period as compared to the 2014 period. Amortization of intangible assets acquired as a percentage of total revenues remained consistent for the 2015 and 2014 periods.

General and Administrative


	Three Months Ended September 30,						$ Change			% Change
	2015			2014			$ Change			% Change
General and administrative (dollars in thousands)	$	6,492		$	6,841		$	(349	)		(5	)%
General and administrative (as a percentage of total revenues)		9	%		10	%

General and administrative expenses decreased $0.3 million, or 5%, for the 2015 period, to $6.5 million as compared to $6.8 million for the 2014 period. The decrease is primarily due to $0.6 million less in costs associated with acquisitions during the 2015 period as compared to the 2014 period, partially offset by increased headcount. Excluding acquisition costs, our total general and administrative expenses as a percentage of total revenues remained consistent for the 2015 and 2014 periods.

Interest Expense, net


	Three Months Ended September 30,						$ Change			% Change
	2015			2014			$ Change			% Change
Interest expense, net (dollars in thousands)	$	(428	)	$	(342	)	$	(86	)		(25	)%

The increase in interest expense, net was primarily due to a full quarter of interest charges included in the 2015 period on the license transfer agreement acquired in the 2014 Ellman acquisition.

Other Expense, net


	Three Months Ended September 30,						$ Change		% Change
	2015			2014			$ Change		% Change
Other expense, net (dollars in thousands)	$	(216	)	$	(827	)	$	611		74	%

The change in other expense, net was primarily a result of decreased net foreign currency remeasurement losses incurred by our foreign subsidiaries in the 2015 period, compared to the 2014 period, primarily due to the weakening of the U.S. dollar against the euro.

Provision for Income Taxes


	Three Months Ended September 30,						$ Change			% Change
	2015			2014			$ Change			% Change
Provision for income taxes (dollars in thousands)	$	962		$	1,007		$	(45	)		(4	)%
Provision as a percentage of income before provision for income taxes		23	%		25	%

The provision for income taxes results from a combination of the activities of our U.S. entities and foreign subsidiaries. During the 2015 period, we recorded an income tax provision of $1.0 million, representing an effective tax rate of 23%. The difference between the U.S. federal statutory tax rate and the effective tax rate was primarily attributable to a discrete tax benefit of $0.5 million recorded in the 2015 period, which was principally due to an increase in 2014 federal and state research credits. Other factors resulting in differences between the U.S. federal statutory tax rate and the effective tax rate are the jurisdictional mix of worldwide earnings, non-deductible expenses and the domestic manufacturing deduction. During the 2014 period, we recorded an income tax provision of $1.0 million, representing an effective tax rate of 25%. The difference between the U.S. federal statutory tax rate and the effective tax rate was primarily attributable to the jurisdictional mix of worldwide earnings, non-deductible expenses and the domestic manufacturing deduction.

NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014

The following table contains selected statement of operations data, which serve as the basis of the discussion of our results of operations for the nine months ended September 30, 2015 and 2014, respectively (in thousands, except for percentages):


	Nine Months Ended September 30,										$ Change		% Change
	2015					2014
	Amount		As a % of Total Revenues			Amount		As a % of Total Revenues
Product revenues	$	190,575		80	%	$	164,969		80	%	$	25,606		16	%
Parts, accessories, service and royalty revenues		46,445		20			41,138		20			5,307		13

Total revenues		237,020		100			206,107		100			30,913		15
Cost of revenues		102,486		43			89,721		44			12,765		14

Gross profit		134,534		57			116,386		56			18,148		16


	Nine Months Ended September 30,												$ Change			% Change
	2015						2014
	Amount			As a % of Total Revenues			Amount			As a % of Total Revenues
Operating expenses
Sales and marketing		78,950			33			62,710			30			16,240			26
Research and development		16,723			7			16,319			8			404			2
Amortization of intangible assets acquired		2,208			1			2,166			1			42			2
General and administrative		22,124			10			22,197			11			(73	)		—

Total operating expenses		120,005			51			103,392			50			16,613			16

Income from operations		14,529			6			12,994			6			1,535			12
Interest expense, net		(1,260	)		—			(1,034	)		(1	)		(226	)		(22	)
Other expense, net		(1,395	)		(1	)		(548	)		—			(847	)		(155	)

Income before provision for income taxes		11,874			5			11,412			5			462			4
Provision for income taxes		3,295			1			3,074			1			221			7

Net income	$	8,579			4	%	$	8,338			4	%	$	241			3	%

Revenues

Total revenues for the nine months ended September 30, 2015 increased by $30.9 million, or 15%, to $237.0 million, as compared to revenues of $206.1 million for the nine months ended September 30, 2014 (in thousands, except for percentages):


	Nine Months Ended September 30,				$ Change			% Change
	2015		2014		$ Change			% Change
Product sales in North America	$	112,810	$	80,893	$	31,917			39	%
Product sales outside North America		77,765		84,076		(6,311	)		(8	)
Global parts, accessories, service and royalty sales		46,445		41,138		5,307			13

Total revenues	$	237,020	$	206,107	$	30,913			15	%

The increase in total revenues was attributable to a number of factors:

•

Revenues from the sales of our products in North America increased by approximately $31.9 million, or 39%, from the 2014 period primarily due to strong sales of PicoSure, Icon and MonaLisa Touch along with three full quarters of sales in the 2015 period attributable to products acquired from Ellman.

•

Revenues from the sales of our products outside of North America decreased by approximately $6.3 million, or 8%, from the 2014 period primarily due to unfavorable exchange rates affecting our European and Asia Pacific subsidiaries and the number of units sold to our European and Middle East distributors.

•

Revenues from the sales of parts, accessories, services and royalties increased by approximately $5.3 million, or 13%, from the 2014 period, primarily due to including three full quarters in the 2015 period of accessories revenues attributable to products acquired from Ellman, partially offset by lower royalty payments received in the 2015 period as compared to the 2014 period.

Cost of Revenues


	Nine Months Ended September 30,						$ Change		% Change
	2015			2014			$ Change		% Change
Cost of revenues (dollars in thousands)	$	102,486		$	89,721		$	12,765		14	%
Cost of revenues (as a percentage of total revenues)		43	%		44	%

Total cost of revenues increased $12.8 million, or 14%, to $102.5 million for the 2015 period, as compared to $89.7 million for the 2014 period. The increase was primarily associated with our 15% increase in total revenues in the 2015 period as compared to the 2014 period. Our total cost of revenues for the 2015 period decreased as a percentage of total revenues, as compared to the 2014 period, resulting in a gross margin percentage of 57% for the 2015 period as compared to 56% for the 2014 period, primarily due to a higher percentage of laser revenue from our North American distribution, where average selling prices tend to be higher.

Sales and Marketing


	Nine Months Ended September 30,						$ Change		% Change
	2015			2014			$ Change		% Change
Sales and marketing (dollars in thousands)	$	78,950		$	62,710		$	16,240		26	%
Sales and marketing (as a percentage of total revenues)		33	%		30	%

Sales and marketing expenses increased $16.2 million, or 26%, to $79.0 million for the 2015 period as compared to $62.7 million for the 2014 period. The increase was primarily due to increases in the number of our sales employees, an increase in commission expense due to increased product revenues and the addition of sales and marketing costs associated with the launch of SculpSure in the 2015 period. Our total sales and marketing expenses for the 2015 period increased as a percentage of total revenues as compared to the 2014 period due primarily to the additional sales and marketing costs associated with the launch of SculpSure.

Research and Development


	Nine Months Ended September 30,						$ Change		% Change
	2015			2014			$ Change		% Change
Research and development (dollars in thousands)	$	16,723		$	16,319		$	404		2	%
Research and development (as a percentage of total revenues)		7	%		8	%

Research and development expenses increased $0.4 million, or 2%, to $16.7 million for the 2015 period as compared to $16.3 million for the 2014 period. The increase was primarily due to the inclusion in the 2015 period of three full quarters of Ellman’s research and development expenses. Our total research and development expenses for the 2015 period decreased as a percentage of total revenues as compared to the 2014 period due to improved operating leverage.

Amortization of Intangible Assets Acquired


	Nine Months Ended September 30,						$ Change		% Change
	2015			2014			$ Change		% Change
Amortization of intangible assets acquired (dollars in thousands)	$	2,208		$	2,166		$	42		2	%
Amortization of intangible assets acquired (as a percentage of total revenues)		1	%		1	%

Amortization of intangible assets acquired increased $42,000, or 2%, for the 2015 period as compared to the 2014 period. Amortization of intangible assets acquired as a percentage of total revenues remained consistent for the 2015 and 2014 periods.

General and Administrative


	Nine Months Ended September 30,						$ Change			% Change
	2015			2014			$ Change			% Change
General and administrative (dollars in thousands)	$	22,124		$	22,197		$	(73	)		—	%
General and administrative (as a percentage of total revenues)		10	%		11	%

General and administrative expenses decreased $73,000 to $22.1 million for the 2015 period, as compared to $22.2 million for the 2014 period. The decrease is primarily due to $3.2 million less in costs associated with acquisitions, partially offset by increased headcount and legal expenses during the 2015 period as compared to the 2014 period. Excluding acquisition costs, our total general and administrative expenses as a percentage of total revenues remained consistent for the 2015 and 2014 periods.

Interest Expense, net


	Nine Months Ended September 30,						$ Change			% Change
	2015			2014			$ Change			% Change
Interest expense, net (dollars in thousands)	$	(1,260	)	$	(1,034	)	$	(226	)		(22	)%

The increase in interest expense, net was primarily due to three full quarters of interest charges included in the 2015 period on the license transfer agreement acquired in the 2014 Ellman acquisition.

Other Expense, net


	Nine Months Ended September 30,						$ Change			% Change
	2015			2014			$ Change			% Change
Other expense, net (dollars in thousands)	$	(1,395	)	$	(548	)	$	(847	)		(155	)%

The change in other expense, net was primarily a result of increased net foreign currency remeasurement losses incurred by our foreign subsidiaries in the 2015 period, as compared to the 2014 period, primarily due to the strengthening of the U.S dollar against the euro, Australian dollar, South Korean won and the Chinese yuan.

Provision for Income Taxes


	Nine Months Ended September 30,						$ Change		% Change
	2015			2014			$ Change		% Change
Provision for income taxes (dollars in thousands)	$	3,295		$	3,074		$	221		7	%
Provision as a percentage of income before provision for income taxes		28	%		27	%

The provision for income taxes results from a combination of the activities of our U.S. entities and foreign subsidiaries. During the 2015 period, we recorded an income tax provision of $3.3 million, representing an effective tax rate of 28%. The difference between the U.S. federal statutory tax rate and the effective tax rate was primarily attributable to a discrete tax benefit of $0.5 million for the release of the valuation allowance previously maintained against the net deferred tax assets of Palomar Japan K.K. and a discrete tax benefit of $0.5 million, which was principally due to an increase in 2014 federal and state research credits. Other factors resulting in differences between the U.S. federal statutory tax rate and the effective tax rate are the jurisdictional mix of worldwide earnings, non-deductible expenses and the domestic manufacturing deduction. During the 2014 period, we recorded an income tax provision of $3.1 million, representing an effective tax rate of 27%. The difference between the U.S. federal statutory tax rate and the effective tax rate was primarily attributable to a discrete tax benefit of $0.3 million for the release of the valuation allowance previously maintained against the net deferred tax assets of Cynosure Spain S.L. Other factors resulting in differences between the U.S. federal statutory tax rate and the effective tax rate are the jurisdictional mix of worldwide earnings, non-deductible expenses and the domestic manufacturing deduction.

Liquidity and Capital Resources

We require cash to pay our operating expenses, make capital expenditures, fund acquisitions and pay our long-term liabilities. We have funded our operations through cash generated from our operations and proceeds from public offerings of our Class A common stock.

At September 30, 2015, our cash, cash equivalents and short and long-term marketable securities were $153.3 million. Our cash and cash equivalents of $81.4 million are highly liquid investments with maturities of 90 days or less at date of purchase and consist of cash in operating accounts and investments in money market funds. Our short-term marketable securities of $38.4 million consist of investments in various state and municipal governments, U.S. government agencies and treasuries, all of which mature by September 1, 2016. Our long-term marketable securities of $33.4 million consist of investments in various state and municipal governments, U.S. government agencies and treasuries, all of which mature by September 8, 2017.

Our future capital requirements depend on a number of factors, including the rate of market acceptance of our current and future products, the resources we devote to developing and supporting our products and continued progress of our research and development of new products. During the nine months ended September 30, 2015, we purchased $8.1 million of property and equipment. During the nine months ended September 30, 2014, we purchased $14.0 million of property and equipment, which included $9.2 million for the expansion and improvement of our corporate headquarters. During the nine months ended September 30, 2015 and 2014, we transferred $5.0 million and $3.2 million, respectively, of demonstration equipment to fixed assets. We expect that our capital expenditures during the remainder of 2015 will decrease as compared to the 2014 period as the 2014 period included expenditures associated with the expansion and improvement of our corporate headquarters.

On October 29, 2013, we announced that our board of directors authorized the repurchase of up to $25 million of our Class A common stock, from time to time, on the open market or in privately negotiated transactions under a stock repurchase program. On April 30, 2014, our board of directors approved an increase of $10 million to the stock repurchase program. The program will terminate upon the purchase of $35 million in common stock or expiration of the program on November 15, 2015. During the nine months ended September 30, 2015, we did not repurchase any shares of our common stock under this program. As of September 30, 2015, approximately $4.1 million remains available to repurchase shares under the program. As of September 30, 2015, we have repurchased an aggregate of 1,395,480 shares under this program at an aggregate cost of $30.9 million.

We believe that our current cash, cash equivalents and short and long-term marketable securities, as well as cash generated from operations, will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next 12 months.

Cash Flows

Net cash provided by operating activities was $10.1 million for the nine months ended September 30, 2015, and resulted primarily from the $8.6 million of net income and $20.0 million in depreciation and amortization and stock-based compensation expense for the period. Net changes in working capital items decreased cash from operating activities by $21.8 million primarily related to increases in inventory, prepaid expenses and accounts receivable, partially offset by an increase in deferred revenue. Net cash used in investing activities was $23.3 million for the nine months ended September 30, 2015, which consisted primarily of purchases of marketable securities of $50.4 million and purchases of property and equipment of $8.1 million, partially offset by proceeds from the sales and maturities of marketable securities of $35.2 million. Net cash provided by financing activities during the nine months ended September 30, 2015 was $18.9 million, principally relating to the proceeds from stock option exercises.

Net cash provided by operating activities was $18.0 million for the nine months ended September 30, 2014, and resulted primarily from the $8.3 million of net income and $18.4 million in depreciation and amortization and stock-based compensation expense for the period. Net changes in working capital items decreased cash from operating activities by $11.0 million primarily related to an increase in accounts receivable of $6.0 million and an increase in inventories of $6.3 million. Net cash used in investing activities was $52.3 million for the nine months ended September 30, 2014, which consisted primarily of purchases of marketable securities of $50.7 million, cash paid for the Ellman acquisition of $13.2 million and purchases of property and equipment of $14.0 million, partially offset by proceeds from the sales and maturities of marketable securities of $25.8 million. Net cash used in financing activities during the nine months ended September 30, 2014 was $5.5 million, principally relating to repurchases of common stock offset by the proceeds from stock option exercises.

Contractual Obligations

As of September 30, 2015, there were no material changes, outside of the ordinary course of business, in our outstanding contractual obligations from those disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014.

Off-Balance Sheet Arrangements

Since inception, we have not engaged in any off-balance sheet financing activities.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations set forth above are based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, we evaluate our estimates and judgments, including those described in our Annual Report on Form 10-K for the year ended December 31, 2014. We base our estimates on historical experience and on various assumptions that we believe to be reasonable under the circumstances. These estimates and assumptions form the basis for making judgments about the carrying values of assets and liabilities, and the reported amounts of revenues and expenses, that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. A discussion of our critical accounting policies and the related judgments and estimates affecting the preparation of our consolidated financial statements is included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014. There have been no material changes to our critical accounting policies as of September 30, 2015.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

The following discussion about our market risk disclosures involves forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements. We are exposed to market risk related to changes in interest rates and foreign currency exchange rates. We do not use derivative financial instruments.

Interest Rate Sensitivity. We maintain an investment portfolio consisting mainly of money market funds, state and municipal government obligations, U.S. government agencies and treasuries and corporate obligations and commercial paper. The securities, other than money market funds and certain U.S. government agencies and treasuries are classified as available-for-sale and consequently are recorded on the balance sheet at fair value with unrealized gains and losses reported as a separate component of accumulated other comprehensive loss. All investments mature by September 8, 2017. These available-for-sale securities are subject to interest rate risk and will fall in value if market interest rates increase, which could result in a realized loss if we are forced to sell an investment before its scheduled maturity. We currently have the ability and intent to hold our fixed income investments until maturity. We do not utilize derivative financial instruments to manage our interest rate risks.

The following table provides information about our investment portfolio in available-for-sale debt securities. For investment securities, the table presents principal cash flows (in thousands) and weighted average interest rates by expected maturity dates.


	September 30, 2015			Future Maturities in 2015			Future Maturities in 2016			Future Maturities in 2017
Investments (at fair value)	$	74,349		$	7,049		$	35,822		$	31,478
Weighted average interest rate		0.36	%		0.24	%		0.34	%		0.62	%

Foreign Currency Exchange. A significant portion of our operations is conducted through operations in countries other than the United States. Revenues from our international operations that were recorded in U.S. dollars represented approximately 48% of our total international revenues during the nine months ended September 30, 2015. Substantially all of the remaining 52% were sales in euros, British pounds, Moroccan dirham, Japanese yen, Chinese yuan, South Korean won and Australian dollars. Since we conduct our business in U.S. dollars, our main exposure, if any, results from changes in the exchange rate between these currencies and the U.S. dollar. Our functional currency is the U.S. dollar. Our policy is to reduce exposure to exchange rate fluctuations by having most of our assets and liabilities, as well as most of our revenues and expenditures, in U.S. dollars, or U.S. dollar linked. We have not historically engaged in hedging activities relating to our non-U.S. dollar operations. We sell inventory to our subsidiaries in U.S. dollars. These amounts are recorded at our local subsidiaries in local currency rates in effect on the transaction date. Therefore, we may be exposed to exchange rate fluctuations that occur while the payment is outstanding, which we recognize as unrealized gains and losses in our statements of operations. Upon settlement of these payments, we may record realized foreign exchange gains and losses. We may incur negative foreign currency translation charges as a result of changes in currency exchange rates.

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our chief executive officer and chief financial officer (our principal executive and principal financial officers, respectively), evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2015. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of September 30, 2015, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

We acquired substantially all of the assets of Ellman on September 5, 2014. We have integrated the acquired operations into our overall internal control over financial reporting process and have extended our oversight and monitoring processes that support our internal control over financial reporting to include the acquired operations. There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the third quarter of the year ending December 31, 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II — Other Information

Item 1.

Legal Proceedings

Telephone Consumer Protection Act Litigation

In 2005, a plaintiff, individually and as putative representative of a purported class, filed a complaint against us under the federal Telephone Consumer Protection Act, or TCPA, in Massachusetts Superior Court in Middlesex County, captioned Weitzner v. Cynosure, Inc., No. MICV2005-01778 (Superior Court, Middlesex County), seeking monetary damages, injunctive relief, costs and attorneys’ fees. The complaint alleges that we violated the TCPA by sending unsolicited advertisements by facsimile to the plaintiff and other recipients without the prior express invitation or permission of the recipients. Under the TCPA, recipients of unsolicited facsimile advertisements are entitled to damages of up to $500 per facsimile for inadvertent violations and up to $1,500 per facsimile for knowing or willful violations. Based on discovery in this matter, the plaintiff alleges that approximately three million facsimiles were sent on our behalf by a third party to approximately 100,000 individuals. In January 2012, the court denied the class certification motion. In November 2012, the court issued the final judgment and awarded the plaintiff $6,000 in damages and awarded us $3,495 in costs. The plaintiff appealed this decision, and oral argument on the appeal was held in October 2013 before the Commonwealth of Massachusetts Appeals Court. In March 2014, the appeals court affirmed the lower court’s ruling, and in April 2014 the plaintiff filed a request for further appellate review by the Supreme Judicial Court. On May 6, 2014, the Supreme Judicial Court issued a Notice of Denial of Application for Further Appellate Review. No further appeals are possible in Massachusetts. In addition, in July 2012, the plaintiff filed a new purported class action, based on the same operative facts, asserting the same claims and seeking similar monetary damages, injunctive relief, costs and attorneys’ fees as in the Massachusetts action, in federal court in the Eastern District of New York, captioned Weitzner, et al. v. Cynosure, Inc., No. 1:12-cv-03668-MKB-RLM (U.S District Court, Eastern District of New York). In February 2013, that court granted our motion to dismiss the plaintiff’s claims. In March 2013, the plaintiff drafted a motion seeking reconsideration of the court’s judgment and vacation of the court’s order of dismissal. In April 2013, we drafted a response opposing the plaintiff’s motion. In August 2013, plaintiff filed its motion with the court, although the deadline had been April 2013. We filed a letter with the court objecting to this untimely motion and requesting sanctions. In February 2014, the court denied plaintiff’s motion and denied our request for sanctions. On March 6, 2014, plaintiff filed an appeal of the court’s judgment entered on March 5, 2013. On July 23, 2014, the Second Circuit notified the parties that it will not hear oral arguments and will decide the case based on the briefs. On September 16, 2015, the Second Circuit dismissed the plaintiff’s appeal. On September 30, 2015, the plaintiff filed a Petition for Rehearing with Suggestion for Rehearing En Banc. On October 27, 2015, the Second Circuit issued a corrected opinion which did not change its September 16, 2015 dismissal of the plaintiff’s appeal.

In addition to the matters discussed above, from time to time, we are subject to various claims, lawsuits, disputes with third parties, investigations and pending actions involving various allegations against us incident to the operation of its business, principally product liability. Each of these other matters is subject to various uncertainties, and it is possible that some of these other matters may be resolved unfavorably to us. We establish accruals for losses that management deems to be probable and subject to reasonable estimate. We believe that the ultimate outcome of these other matters will not have a material adverse impact on our consolidated financial position, results of operations or cash flows.

Item 1A.

Risk Factors

We have revised our discussion of the risk factors affecting our business since those presented in our Annual Report on Form 10-K, Part I, Item 1A, for the fiscal year ended December 31, 2014. We have denoted with an asterisk (*) those risk factors that have been materially revised. If any of the following risks actually occurs, our business, financial condition, results of operations and cash flows could be materially adversely affected. This section contains forward-looking statements. You should refer to the explanation of the qualifications and limitations on forward-looking statements beginning on page 13.

Risks Related to Our Business and Industry

We have incurred net losses in prior periods.

Although we were profitable in the second and third quarters of 2015 and in 2014 and 2012, we incurred losses in the first quarter of 2015 and in 2013, 2011 and 2010. If we are unable to maintain profitability, the market value of our stock may decline, and an investor could lose all or a part of their investment.

If there is not sufficient consumer demand for the procedures performed with our products, practitioner demand for our products could decline, which would adversely affect our operating results.

The aesthetic laser and light-based treatment system industry in which we operate is particularly vulnerable to economic trends. Most procedures performed using our aesthetic treatment systems are elective procedures that are not reimbursable through government or private health insurance. The cost of these elective procedures must be borne by the patient. As a result, the decision to undergo a procedure that utilizes our products may be influenced by the cost.

Consumer demand, and therefore our business, is sensitive to a number of factors that affect consumer spending, including political and macroeconomic conditions, health of credit markets, disposable consumer income levels, consumer debt levels, interest rates, consumer confidence and other factors. For example, consumer demand for the procedures performed with our products, and practitioner demand for our products, decreased dramatically during 2009 as a result of turmoil in the financial markets, which contributed to a significant decrease in our total product revenues during that year. If there is not sufficient consumer demand for the procedures performed with our products, practitioner demand for our products would decline, and our business would suffer.

Our financial results may fluctuate from quarter to quarter, which makes our results difficult to predict and could cause our results to fall short of expectations.

Our financial results may fluctuate as a result of a number of factors, many of which are outside of our control. For these reasons, comparing our financial results on a period-to-period basis may not be meaningful, and you should not rely on our past results as an indication of our future performance. Our future quarterly and annual expenses as a percentage of our revenues may be significantly different from those we have recorded in the past or which we expect for the future. Our financial results in some quarters may fall below our expectations or the expectations of market analysts or investors. Any of these events could cause our stock price to fall. Each of the risk factors listed in this “Risk Factors” section, and the following factors, may adversely affect our financial results:

•

our inability to introduce new products to the market in a timely fashion, or at all;

•

our inability to quickly address and resolve reliability issues in our products and/or meet warranty and service obligations to our customers;

•

continued availability of attractive equipment leasing terms for our customers, which may be negatively influenced by interest rate increases or lack of available credit;

•

increases in the length of our sales cycle; and

•

reductions in the efficiency of our manufacturing processes.

In addition, we may be subject to seasonal fluctuations in our results of operations, because our customers may be more likely to make equipment purchasing decisions near year-end, and because practitioners may be less likely to make purchasing decisions in the summer months.

Our competitors may prevent us from achieving further market penetration or improving operating results.

Competition in the aesthetic device industry is intense. Our products compete against products offered by public companies, such as Cutera, Syneron Medical, and ZELTIQ Aesthetics, as well as several smaller specialized private companies, such as Alma Lasers and Lumenis. Additional competitors may enter the market, and we are likely to compete with new companies in the future.

We also face competition against non-light-based medical products, such as BOTOX^® and collagen injections, and surgical and non-surgical aesthetic procedures, such as face lifts, chemical peels, abdominoplasty, liposuction, microdermabrasion, sclerotherapy and electrolysis. We may also face competition from manufacturers of pharmaceutical and other products that have not yet been developed. As a result of competition with these companies, products and procedures, we could experience loss of market share and decreasing revenue, as well as reduced prices and profit margins, any of which would harm our business and operating results.

Our ability to compete effectively depends upon our ability to distinguish our company and our products from our competitors and their products. Factors affecting our competitive position include:

•

product performance, reliability and design;

•

ability to sell products tailored to meet the applications needs of clients and patients;

•

quality of customer support;

•

product pricing;

•

product safety;

•

sales, marketing and distribution capabilities;

•

success and timing of new product development and introductions; and

•

intellectual property protection.

We face exposure to credit risk of customers.

In the event of deterioration of general business conditions or the availability of credit, the financial strength and stability of our customers and potential customers may deteriorate over time, which may cause them to cancel or delay their purchase of our products. In addition, we may be subject to increased risk of non-payment of our accounts receivables. We may also be adversely affected by bankruptcies or other business failures of our customers and potential customers. A significant delay in the collection of funds or a reduction of funds collected may impact our liquidity or result in bad debts.

If we do not continue to develop and commercialize new products and identify new markets for our products and technology, we may not remain competitive, and our revenues and operating results could suffer.

The aesthetic laser and light-based treatment system industry is subject to continuous technological development and product innovation. If we do not continue to innovate and develop new products and applications, our competitive position will likely deteriorate as other companies successfully design and commercialize new products and applications. Accordingly, our success depends in part on developing or acquiring new and innovative applications of laser and other light-based technology and identifying new markets for and applications of existing products and technology. If we are unable to develop and commercialize new products, identify and acquire complementary businesses, products or technologies, and identify new markets for our products and technology, our product and technology offerings could become obsolete and our revenues and operating results could be adversely affected.

To remain competitive, we must:

•

develop or acquire new technologies that either add to or significantly improve our current products;

•

convince our target practitioner customers that our new products or product upgrades would be attractive revenue-generating additions to their practices;

•

sell our products to non-traditional customers, including primary care physicians, gynecologists and other specialists;

•

identify new markets and emerging technological trends in our target markets and react effectively to technological changes;

•

preserve goodwill and brand value with customers; and

•

maintain effective sales and marketing strategies.

If our new products do not gain market acceptance, our revenues and operating results could suffer, and our newer generation product sales could cause earlier generation product sales to suffer.

The commercial success of the products and technology we develop will depend upon the acceptance of these products by providers of aesthetic procedures and their patients and clients, and in the case of our home-use system, consumers. It is difficult for us to predict how successful recently introduced products, or products we are currently developing, will be over the long term. If the products we develop do not gain market acceptance or meet customer expectations, our revenues and operating results could suffer.

We expect that many of the products we develop will be based upon new technologies or new applications of existing technologies. It may be difficult for us to achieve market acceptance of some of our products, particularly the first products that we introduce to the market based on new technologies or new applications of existing technologies.

As we introduce new technologies to the market, our earlier generation product sales could suffer, which may result in write-offs of those earlier generation products. For example, in 2009, we recorded a $2.1 million charge to cost of product revenues related to the write-down of an earlier generation product. The write-down resulted, in part, from customers adopting our newer generation products more quickly than we anticipated, coupled with the downturn in the overall aesthetic laser market.

If demand for our aesthetic treatment systems by physician customers does not increase, our revenues will suffer and our business will be harmed.

We market our aesthetic treatment systems to physicians and other practitioners. In addition, through our development agreement with Unilever, we began to address the home-use aesthetic laser market in the second half of 2014. We believe, and our growth expectations assume, that we and other companies selling lasers and other light-based aesthetic treatment systems have not fully penetrated these markets and that we will continue to receive a significant percentage of our revenues from selling to these markets. If our expectations as to the size of these markets and our ability to sell our products to participants in these markets are not correct, our revenues will suffer and our business will be harmed.

We sell our products and services through subsidiaries and distributors in numerous international markets. Our operating results may suffer if we are unable to manage our international operations effectively.

We sell our products and services through subsidiaries and distributors in approximately 120 foreign countries, and we therefore are subject to risks associated with having international operations. We derived 41% of our product revenues from sales outside North America for the nine months ended September 30, 2015. We derived 48%, 48%, and 49% of our product revenues from sales outside North America for the years ended December 31, 2014, 2013, and 2012, respectively.

Our international sales are subject to a number of risks, including:

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foreign certification and regulatory requirements;

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difficulties in staffing and managing our foreign operations;

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import and export controls; and

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political and economic instability.

If we are unsuccessful at managing these risks, our results of operations may be adversely affected.

*We may incur foreign currency translation charges as a result of changes in currency exchange rates, which could cause our operating results to suffer.

The U.S. dollar is our functional currency. Although we sell our products and services through subsidiaries and distributors in approximately 120 foreign countries, approximately 48% of our revenues outside of North America for the nine months ended September 30, 2015, and 47% of our revenues outside of North America for the year ended December 31, 2014, were denominated in or linked to the U.S. dollar. Substantially all of our remaining revenues and all of our operating costs outside of North America are recognized in euros, British pounds, Moroccan dirham, Japanese yen, Chinese yuan, South Korean won and Australian dollars. We have not historically engaged in hedging activities relating to our non-U.S. dollar operations. Fluctuations in exchange rates between the currencies in which such revenues are realized or costs are incurred and the U.S. dollar may have a material adverse effect on our results of operations and financial condition. For the nine months ended September 30, 2015 we incurred a loss on foreign currency of

$1.7 million, which is recorded as other expense, net within our consolidated statement of operations. This was primarily due to the strengthening of the U.S. dollar against the euro, British pound, Japanese yen, Australian dollar, South Korean won and Chinese yuan. Unfavorable foreign exchange rates also had a negative impact on our European and Asia Pacific subsidiaries’ revenues for the nine months ended September 30, 2015.

We may not receive revenues from our current research and development efforts for several years, if at all.

Investment in product development often involves a long payback cycle and risks associated with new technology. For example, our PicoSure laser system, which we launched in 2013, was in development for several years. Our SculpSure laser system, which we launched in the second half of 2015, was in development for five years. We have made and expect to continue making significant investments in research and development and related product opportunities. Accelerated product introductions and short product life cycles require high levels of expenditures for research and development that could adversely affect our operating results if not offset by revenue increases. We believe that we must continue to dedicate a significant amount of resources to our research and development efforts to maintain our competitive position. However, we may not generate anticipated revenues from these investments for several years, if at all.

Because we do not require training for users of our non-invasive products, and we sell these products to non-physicians, there exists an increased potential for misuse of these products, which could harm our reputation and our business.

Federal regulations allow us to sell our products to or on the order of practitioners licensed by law to use or order the use of a prescription device. The definition of “licensed practitioners” varies from state to state. As a result, our products may be purchased or operated by physicians with varying levels of training and, in many states, by non-physicians, including nurse practitioners, chiropractors and technicians. Outside the United States, many jurisdictions do not require specific qualifications or training for purchasers or operators of our products. We do not supervise the procedures performed with our products, nor can we require that direct medical supervision occur. We and our distributors offer product training sessions, but neither we nor our distributors require purchasers or operators of our non-invasive products to attend training sessions. The lack of required training and the purchase and use of our non-invasive products by non-physicians may result in product misuse and adverse treatment outcomes, which could harm our reputation and expose us to costly product liability litigation.

We may be unable to attract and retain management and other personnel we need to succeed.

Our success depends on the services of our senior management and other key research and development, manufacturing, sales and marketing employees. The loss of the services of one or more of these employees could have a material adverse effect on our business. We consider retaining Michael R. Davin, our chief executive officer, key to our efforts to develop, sell and market our products and remain competitive. We have entered into an employment agreement with Mr. Davin; however, the employment agreement is terminable by him on short notice and may not ensure his continued service with our company. Our future success will depend in large part upon our ability to attract, retain and motivate highly skilled employees. We cannot be certain that we will be able to do so.

We may seek to acquire companies or technologies that could disrupt our ongoing business, divert the attention of our management and employees and adversely affect our results of operations.

We may, from time to time, evaluate potential strategic acquisitions of other complementary businesses, products or technologies, as well as consider joint ventures and other collaborative projects. We may not be able to identify suitable future acquisition candidates, consummate acquisitions on favorable terms or complete otherwise favorable acquisitions because of antitrust or other regulatory concerns. We cannot assure you that the acquisitions we have completed, including our September 2014 acquisition of substantially all of the assets of Ellman, or any future acquisitions that we may make, will enhance our products or strengthen our competitive position. In particular, we may encounter difficulties assimilating or integrating the acquired businesses, technologies, products, personnel or operations of the acquired companies, and in retaining and motivating key personnel from these businesses. The integration of these businesses may not result in the realization of the full benefits of synergies, cost savings, innovation and operational efficiencies that may be possible from this integration and these benefits may not be achieved within a reasonable period of time.

Our stock price has fluctuated substantially, and we expect it will continue to do so.

Our Class A common stock price has fluctuated substantially in recent years. From January 1, 2012 through October 29, 2015, our Class A common stock has traded as high as $42.97 per share and as low as $11.64 per share. The stock market in general has experienced extreme volatility that has often been unrelated to the operating performance of particular companies. The market price for our Class A common stock may be influenced by many factors, including:

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the success of competitive products or technologies;

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regulatory developments in the United States and foreign countries;

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developments or disputes concerning patents or other proprietary rights;

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the recruitment or departure of key personnel;

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variations in our financial results or those of companies that are perceived to be similar to us;

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market conditions in our industry and issuance of new or changed securities analysts’ reports or recommendations; and

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general economic, industry and market conditions.

In addition, if the stock market in general experiences a loss of investor confidence, the trading price of our Class A common stock could decline for reasons unrelated to our business, financial condition or results of operations.

Our common stock could be further diluted by the conversion of outstanding options and restricted stock units.

In the past, we have issued and still have outstanding convertible securities in the form of options and restricted stock units. We may continue to issue options, restricted stock units, and other equity rights as compensation for services and incentive compensation for our employees, directors and consultants or others who provide services to us. We have a substantial number of shares of common stock reserved for issuance upon the conversion and exercise of these securities. Such a conversion would dilute our stockholders and could adversely affect the market price of our common stock.

We may not be able to successfully collect licensing royalties.

Portions of our revenues consist of royalties from sub-licensing patents, including patents licensed to us on an exclusive basis by MGH. These patents expired in the United States on February 1, 2015 and their foreign counterparts will expire in several foreign jurisdictions on January 31, 2016. If we are unable to collect our licensing royalties, our revenues will decline. In addition, though we receive royalty revenues on other patents, our revenues will decline as a result of the expiration of the MGH patents because we will no longer receive any royalties from such patents.

We face risks associated with product warranties.

We could incur substantial costs as a result of product failures for which we are responsible under warranty obligations.

If we are unable to protect our information technology infrastructure against service interruptions, data corruption, cyber-based attacks or network security breaches, our reputation, business and operating results may suffer.

We rely on information technology networks and systems, including the Internet, to process and transmit sensitive electronic information and to manage or support a variety of business processes and activities, including procurement and supply chain, manufacturing, distribution, and invoicing and collection of payments for our products. We use enterprise information technology systems to record, process, and summarize financial information and results of operations for internal reporting purposes and to comply with regulatory financial reporting, legal, and tax requirements. Our information technology systems, some of which are managed by third parties, are susceptible to damage, disruptions or shutdowns due to failures during the process of upgrading or replacing software, databases or components thereof, power outages, hardware failures, computer viruses, attacks by computer hackers, telecommunication failures, user errors or catastrophic events. If our information technology systems suffer severe damage, disruption or shutdown and we are unable to effectively resolve the issues in a timely manner, our reputation, business and operating results may suffer.

Risks Related to Our Reliance on Third Parties

If we fail to obtain key components of our products from our sole source or limited source suppliers or service providers, our ability to manufacture and sell our products would be impaired and our business could be materially harmed.

We depend on sole or limited suppliers of certain components and systems that are critical to the products that we manufacture and sell, and to which the significant majority of our revenues are attributable. We depend on a single contract manufacturer in the United States for the subassembly of certain products that we manufacture and sell, and for the manufacturing of certain products that we sell, and to which a significant portion of our revenues are attributable to these products. We depend on El.En. for the SLT II laser system that we integrate with our own proprietary software and delivery systems into our SmartLipo Triplex, Cellulaze systems and PrecisionTx. We also depend on El.En. for the MonaLisa Touch laser system. For further information regarding our distribution agreements with El.En. please see the discussion on page 19 of our Annual Report on Form 10-K for the year ended December 31, 2014. We use Alexandrite rods to manufacture the lasers for our Elite and PicoSure products and Nd:YAG rods to manufacture the lasers for our RevLite / MedLite C6 products. We depend exclusively on Northrop Grumman SYNOPTICS to supply both the Alexandrite and Nd:YAG rods to us, and we are aware of no alternative supplier of Alexandrite rods meeting our quality standards. We use gaussian mirrors and polarizers to manufacture our RevLite / MedLite C6 product lines, for which we depend exclusively on Channel Islands Opto-Mechanical Engineering and JDS Uniphase Corporation, respectively. We offer our SmartCool treatment cooling systems for use with our laser aesthetic treatment systems, and we depend exclusively on Zimmer Elektromedizin GmbH to supply SmartCool systems to us. In addition, one third party supplier assembles and tests many of the components and subassemblies for our Elite, Cynergy, SmoothShapes XV and Accolade product families. We use diode laser subassemblies from IPG Photonics to manufacture our Aspire^® body sculpting system with SlimLipo handpiece, and we use diode laser bars from Coherent to manufacture our Vectus Laser. Although alternative suppliers exist for the diode laser subassemblies and diode laser bars, they could take months to qualify and implement.

Other than with El.En., we do not have long-term arrangements with any of our suppliers or our contract manufacturer for the supply of these components or systems or with the assembly and test service provider referenced above, but instead purchase from them on a purchase order basis. Northrop Grumman SYNOPTICS, Channel Islands Opto-Mechanical Engineering, JDS Uniphase, Zimmer Elektromedizin, IPG Photonics and Coherent are not required, and may not be able or willing, to meet our future requirements at current prices, or at all.

Under our agreements with El.En. and our purchase order arrangements with our other suppliers and service providers, we are vulnerable to supply shortages and cessations and price fluctuations with respect to these critical components and systems and services. Such shortages or cessations could occur either as a result of breach by El.En. or us of our distribution agreements, or as a result of other types of business decisions made by El.En. or other suppliers and service providers. Any extended interruption in our supplies of these components or systems or in the assembly and test services could materially harm our business.

We rely on third party distributors to market, sell and service a significant portion of our products. If these distributors do not commit the necessary resources to effectively market, sell and service our products or if our relationships with these distributors are disrupted, our business and operating results may be harmed.

In the United States, Canada, Mexico, France, Morocco, Germany, Spain, the United Kingdom, Australia, China, Japan and Korea, we sell our products through our internal sales organization. Outside of these markets, we sell our products through third party distributors. Our home-use laser system for the treatment of wrinkles, which launched in the United States in the second quarter of 2014, is sold by Unilever. Our sales and marketing success in these other markets depends on these distributors, in particular their sales and service expertise and relationships with the customers in the marketplace. Sales of our aesthetic treatment systems by third party distributors represented 18% of our product revenue for the nine months ended September 30, 2015. Sales of our aesthetic treatment systems by third party distributors represented 21%, 25% and 25% of our product revenue for the years ended December 31, 2014, 2013, and 2012, respectively.

We do not control our distributors or Unilever, and these parties may not be successful in marketing our products. These parties may fail to commit the necessary resources to market and sell our products to the level of our expectations. Currently, we have written distributor agreements in place with most of our third party distributors and a distribution and licensing agreement in place with Unilever. We cannot be sure that our distributors or Unilever will agree with our interpretation of the terms of the agreements or that we will receive payments under the agreements. The third party distributors with which we do not have written distributor agreements may also disagree with the terms of our relationship. Our distributors and Unilever may terminate their relationships with us and stop selling and servicing our products with little or no notice. If current or future third party distributors or other parties that sell our products do not perform adequately, or if we fail to maintain our existing relationships with these parties or fail to recruit and retain distributors in particular geographic areas, our revenue from international sales may be adversely affected and our operating results could suffer. If Unilever fails to successfully sell the home-use product or we fail to maintain our relationship with Unilever, this could have an adverse effect on our business, results of operations and financial condition.

Risks Related to Our Relationship with El.En. and Our Corporate Structure

El.En. and its subsidiaries market and sell products that compete with our products, and any increased competition from El.En. could have a material adverse effect on our business.

El.En. is a leading laser manufacturer in Europe and a leading light-based medical device manufacturer worldwide. El.En. and its subsidiaries develop and produce laser systems with scientific, industrial, commercial and medical applications. Under exclusive distribution agreements with El.En., we purchase from El.En. its proprietary SmartLipo MPX system and its SLT II laser system. The SLT II laser system is an essential component of our SmartLipo Triplex and Cellulaze systems, which also incorporate our proprietary software and delivery systems. We also depend on El.En. for the MonaLisa Touch laser system. For further information regarding our distribution agreements with El.En. please see the discussion on page 19 of our Annual Report on Form 10-K for the year ended December 31, 2014.

El.En. markets, sells, promotes and licenses other products that compete with our products, both in North America and elsewhere throughout the world and our agreements with El.En.do not prevent El.En from competing with us by selling products that we purchased in the past from El.En., including earlier generation SmartLipo systems. Our business could be materially and adversely affected by increased competition from El.En.

Provisions in our corporate charter documents and under Delaware law may delay or prevent attempts by our stockholders to change our management and hinder efforts to acquire a controlling interest in us.

Provisions of our certificate of incorporation and bylaws may discourage, delay or prevent a merger, acquisition or other change in control that stockholders may consider favorable, including transactions in which our stockholders might otherwise receive a premium for their shares. These provisions may also prevent or frustrate attempts by our stockholders to replace or remove our management. These provisions include:

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the classification of the members of our board of directors;

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limitations on the removal of our directors;

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advance notice requirements for stockholder proposals and nominations;

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the inability of stockholders to act by written consent or to call special meetings; and

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the ability of our board of directors to designate the terms of and issue new series of preferred stock without stockholder approval, which could be used to institute a “poison pill” that would work to dilute the stock ownership of a potential hostile acquirer, effectively preventing acquisitions that have not been approved by our board of directors.

The affirmative vote of the holders of at least 75% of our shares of capital stock entitled to vote is necessary to amend or repeal the above provisions of our certificate of incorporation. In addition, absent approval of our board of directors, our bylaws may only be amended or repealed by the affirmative vote of the holders of at least 75% of the voting power of our shares of capital stock entitled to vote. Further, Section 203 of the Delaware General Corporation Law prohibits a publicly held Delaware corporation from engaging in a business combination with an interested stockholder, generally a person which together with its affiliates owns or within the last three years has owned 15% of our voting stock, for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. Accordingly, Section 203 may discourage, delay or prevent a change in control of our company.

Risks Related to Intellectual Property

If we infringe or are alleged to infringe intellectual property rights of third parties, our business could be adversely affected.

Our products may infringe or be claimed to infringe patents or patent applications under which we do not hold licenses or other rights. Third parties may own or control these patents and patent applications in the United States and abroad. These third parties could bring claims against us that would cause us to incur substantial expenses and, if successfully asserted against us, could cause us to pay substantial damages. Further, if a patent infringement suit were brought against us, we could be forced to stop or delay manufacturing or sales of the product that is the subject of the suit.

As a result of patent infringement claims, or in order to avoid potential claims, we may choose or be required to seek a license from the third party and be required to pay license fees or royalties or both, as we did in a 2006 patent license agreement with Palomar. Such licenses may not be available on acceptable terms, or at all. Even if we were able to obtain a license, the rights may be nonexclusive, which could result in our competitors gaining access to the same intellectual property. Ultimately, we could be forced to cease some aspect of our business operations if, as a result of actual or threatened patent infringement claims, we are unable to enter into licenses on acceptable terms. This could harm our business significantly.

There has been substantial litigation and other proceedings regarding patent and other intellectual property rights in our industry. In addition to infringement claims against us, we may become a party to other types of patent litigation and other proceedings, including reexamination proceedings, inter partes or post-grant review or interference proceedings declared by the U.S. Patent and Trademark Office and opposition proceedings in the European Patent Office, regarding intellectual property rights with respect to our products and technology. The cost to us of any patent litigation or other proceeding, even if resolved in our favor, could be substantial. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could have a material adverse effect on our ability to compete in the marketplace. Patent litigation and other proceedings may also absorb significant management time.

If we are unable to obtain or maintain intellectual property rights relating to our technology and products, the commercial value of our technology and products will be adversely affected and our competitive position could be harmed.

Our success and ability to compete depends in part upon our ability to obtain protection in the United States and other countries for our products by establishing and maintaining intellectual property rights relating to or incorporated into our technology and products. We own numerous patents and patent applications in the United States and corresponding patents and patent applications in many foreign jurisdictions. We do not know how successful we would be in any instance in which we asserted our patents against suspected infringers. Our pending and future patent applications may not issue as patents or, if issued, may not issue in a form that would be advantageous to us. Even if issued, our patents may be challenged, narrowed, invalidated or circumvented, which could limit our ability to stop competitors from marketing similar products or limit the length of term of patent protection we may have for our products. Changes in either patent laws or in interpretations of patent laws in the United States and other countries may diminish the value of our intellectual property or narrow the scope of our patent protection.

If we are unable to protect the confidentiality of our proprietary information and know-how, the value of our technology and products could be adversely affected.

In addition to patented technology, we rely upon unpatented proprietary technology, processes and know-how. We generally seek to protect this information in part by confidentiality agreements with our employees, consultants and third parties. These agreements may be breached, and we may not have adequate remedies for any such breach. In addition, our trade secrets may otherwise become known or be independently developed by competitors.

Risks Related to Government Regulation

If we fail to obtain and maintain necessary FDA clearances for our products and indications or if clearances for future products and indications are delayed or not issued, our business would be harmed.

Our products are classified as medical devices and are subject to extensive regulation by the FDA and other federal, state and local authorities. These regulations relate to manufacturing, labeling, sale, promotion, distribution, importing and exporting and shipping of our products. In the United States, before we can market a new medical device, or a new use of, or claim for, an existing product, we must first receive either 510(k) clearance or premarket approval from the FDA, unless an exemption applies. Both of these processes can be expensive and lengthy and entail significant user fees, unless exempt. The FDA’s 510(k) clearance process often takes from three to 12 months. The FDA may require us to withdraw an application if they cannot make a determination that the device is substantially equivalent according to the regulations. In such situations, we may re-submit the 510(k) application with additional data for reconsideration or we may determine not to commercialize the device or the new indication for use. The process of obtaining premarket approval is much more costly and uncertain than the 510(k) clearance process. It generally takes from one to three years, or even longer, from the time the premarket approval application is submitted to the FDA until an approval is obtained.

In order to obtain premarket approval and, in some cases, a 510(k) clearance, a product sponsor must conduct well controlled clinical trials designed to test the safety and effectiveness of the product. Conducting clinical trials generally entails a long, expensive and uncertain process that is subject to delays and failure at any stage. The data obtained from clinical trials may be inadequate to support approval or clearance of a submission. In addition, the occurrence of unexpected findings in connection with clinical trials may prevent or delay obtaining approval or clearance. If we conduct clinical trials, they may be delayed or halted, or be inadequate to support approval or clearance, for numerous reasons, including:

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the FDA, other regulatory authorities or an institutional review board may place a clinical trial on hold;

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patients may not enroll in clinical trials, or patient follow-up may not occur, at the rate we expect;

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patients may not comply with trial protocols;

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institutional review boards and third party clinical investigators may delay or reject our trial protocol;

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third party clinical investigators may decline to participate in a trial or may not perform a trial on our anticipated schedule or consistent with the clinical trial protocol, good clinical practices, or other FDA requirements;

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third party organizations may not perform data collection and analysis in a timely or accurate manner;

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regulatory inspections of our clinical trials or manufacturing facilities may, among other things, require us to undertake corrective action or suspend or terminate our clinical trials, or invalidate our clinical trials;

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changes in governmental regulations or administrative actions; and

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the interim or final results of the clinical trials may be inconclusive or unfavorable as to safety or effectiveness.

Medical devices may be marketed only for the indications for which they are approved or cleared. The FDA may not approve or clear indications that are necessary or desirable for successful commercialization. Indeed, the FDA may refuse our requests for 510(k) clearance or premarket approval of new products, new intended uses or modifications to existing products. Our clearances can be revoked if safety or effectiveness problems develop.

After clearance or approval of our products, we are subject to continuing regulation by the FDA and other regulators, and if we fail to comply with FDA regulations, our business could suffer.

Even after clearance or approval of a product, we are subject to continuing regulation by the FDA, including the requirements that our facility be registered and our devices be listed with the agency. We are subject to Medical Device Reporting regulations, which require us to report to the FDA if our products may have caused or contributed to a death or serious injury or malfunction in a way that would likely cause or contribute to a death or serious injury if the malfunction were to recur. We must report corrections and removals to the FDA where the correction or removal was initiated to reduce a risk to health posed by the device or to remedy a violation of the Federal Food, Drug, and Cosmetic Act caused by the device that may present a risk to health, and maintain records of other corrections or removals. The FDA closely regulates promotion and advertising, and our promotional and advertising activities could come under scrutiny. If the FDA objects to our promotional and advertising activities or finds that we failed to submit reports under the Medical Device Reporting regulations, for example, the FDA may allege our activities resulted in violations. We may also be subject to various state or other regulations.

The FDA and state authorities have broad enforcement powers. Our failure to comply with applicable regulatory requirements could result in enforcement action by the FDA or state agencies, which may include any of the following sanctions:

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untitled letters, warning letters, fines, injunctions, consent decrees and civil penalties;

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repair, replacement, refunds, recall or seizure of our products;

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operating restrictions or partial suspension or total shutdown of production;

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refusing or delaying our requests for 510(k) clearance or premarket approval of new products or new intended uses;

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withdrawing 510(k) clearance or premarket approvals that have already been granted; and

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criminal prosecution.

If any of these events were to occur, they could harm our business.

Federal regulatory reforms may adversely affect our ability to sell our products profitably.

From time to time, legislation is drafted and introduced in Congress that could significantly change the statutory provisions governing the clearance or approval, manufacture and marketing of a device. In addition, FDA regulations and guidance are often revised or reinterpreted by the agency in ways that may significantly affect our business and our products. For example, the FDA had proposed changing its standards for determining when a medical device modification must receive premarket clearance or approval. Although Congress objected to these revised standards, it is possible that the FDA will seek to implement these or similar changes in the future.

In addition, most of the products and systems that we sell became subject in 2013 to a new excise tax on sales of certain medical devices in the United States after December 31, 2012 by the manufacturer, producer or importer in an amount equal to 2.3% of the sale price. Under the law, additional charges, including warranties, may be deemed to be included in the sale price for purposes of determining the amount of the excise tax. We believe this excise tax could harm our sales and reduce our profitability.

The Patient Protection and Affordable Care Act includes reporting and disclosure requirements, commonly referred to as the “Sunshine Act”, for manufacturers of drugs, biological, medical devices and medical supplies with regard to payments or other

transfers of value made to certain physicians and teaching hospitals. The final rules implementing the Sunshine Act are complex, ambiguous, and broad in scope. Sales related to the Ellman surgical product line are subject to the reporting requirements under the Sunshine Act. We believe that sales related to our aesthetic product lines fall under a reporting exception under this law and, accordingly, reporting related to those sales is not required.

Our compliance with applicable legal and regulatory requirements is, and will continue to be, costly and time consuming. It is impossible to predict whether other legislative changes will be enacted or government regulations, guidance or interpretations changed, and what the impact of such changes, if any, may be. If we are found to be in violation of any of this or any other law, we may be subject to penalties, including fines.

We have modified some of our products without FDA clearance. The FDA could retroactively determine that the modifications were improper and require us to stop marketing and recall the modified products.

Any modifications to one of our FDA-cleared devices that could significantly affect its safety or effectiveness, or that would constitute a major change in its intended use, requires a new 510(k) clearance or a premarket approval. We may be required to submit extensive pre-clinical and clinical data depending on the nature of the changes. We may not be able to obtain additional 510(k) clearances or premarket approvals for modifications to, or additional indications for, our existing products in a timely fashion, or at all. Delays in obtaining future clearances or approvals would adversely affect our ability to introduce new or enhanced products in a timely manner, which in turn would harm our revenue and operating results. We have made modifications to our devices in the past and may make additional modifications in the future that we believe do not or will not require additional clearances or approvals. If the FDA disagrees, and requires new clearances or approvals for the modifications, we may be required to recall and to stop marketing the modified devices, which could harm our operating results and require us to redesign, among other things, our products.

If we fail to comply with the FDA’s Quality System Regulation and laser performance standards, our manufacturing operations could be halted, and our business would suffer.

We are currently required to demonstrate and maintain compliance with the FDA’s Quality Systems Regulation, or the QSR. The QSR is a complex regulatory scheme that covers the methods and documentation of the design, testing, control, manufacturing, labeling, quality assurance, packaging, storage and shipping of our products. Because our products involve the use of lasers, our products also are covered by a performance standard for lasers set forth in FDA regulations. The laser performance standard imposes specific record keeping, reporting, product testing and product labeling requirements. These requirements include affixing warning labels to laser products, as well as incorporating certain safety features in the design of laser products. The FDA enforces the QSR and laser performance standards through periodic unannounced inspections. We have been, and anticipate in the future being, subject to such inspections. Our failure to comply with the QSR or to take satisfactory corrective action in response to an adverse QSR inspection or our failure to comply with applicable laser performance standards could result in enforcement actions, including a public warning letter, a shutdown of or restrictions on our manufacturing operations, delays in approving or clearing a product, refusal to permit the import or export of our products, a recall or seizure of our products, fines, injunctions, civil or criminal penalties, or other sanctions, such as those described in the preceding paragraphs, any of which could cause our business and operating results to suffer.

If we fail to comply with state laws and regulations, or if state laws or regulations change, our business could suffer.

In addition to FDA regulations, most of our products are also subject to state regulations relating to their sale and use. These regulations are complex and vary from state to state, which complicates monitoring compliance. In addition, these regulations are in many instances in flux. For example, federal regulations allow our prescription products to be sold to or on the order of “licensed practitioners,” that is, practitioners licensed by law to use or order the use of a prescription device. Licensed practitioners are defined on a state-by-state basis. As a result, some states permit non-physicians to purchase and operate our products, while other states do not. Additionally, a state could change its regulations at any time to prohibit sales to particular types of customers. We believe that, to date, we have sold our prescription products only to licensed practitioners. Our failure to comply with state laws or regulations and changes in state laws or regulations may adversely affect our business.

We, or our distributors, may be unable to obtain or maintain international regulatory qualifications or approvals for our current or future products and indications, which could harm our business.

Sales of our products outside the United States are subject to foreign regulatory requirements that vary widely from country to country. In many countries, our third party distributors are responsible for obtaining and maintaining regulatory approvals for our products. We do not control our third party distributors, and they may not be successful in obtaining or maintaining these regulatory approvals. In addition, the FDA regulates exports of medical devices from the United States.

Complying with international regulatory requirements can be an expensive and time consuming process, and approval is not certain. The time required to obtain foreign clearances or approvals may be longer than that required for FDA clearance or approval, and requirements for such clearances or approvals may differ significantly from FDA requirements. Foreign regulatory authorities may not clear or approve our products for the same indications cleared or approved by the FDA. The foreign regulatory approval process may include all of the risks associated with obtaining FDA clearance or approval in addition to other risks. Although we or our distributors have obtained regulatory approvals in the European Union and other countries outside the United States for many of our products, we or our distributors may be unable to maintain regulatory qualifications, clearances or approvals in these countries or obtain qualifications, clearances or approvals in other countries. If we are not successful in doing so, our business will be harmed. We may also incur significant costs in attempting to obtain and in maintaining foreign regulatory clearances, approvals or qualifications. Foreign regulatory agencies, as well as the FDA, periodically inspect manufacturing facilities both in the United States and abroad. If we experience delays in receiving necessary qualifications, clearances or approvals to market our products outside the United States, or if we fail to receive those qualifications, clearances or approvals, or if we fail to comply with other foreign regulatory requirements, we and our distributors may be unable to market our products or enhancements in international markets effectively, or at all. Additionally, the imposition of new requirements may significantly affect our business and our products. We may not be able to adjust to such new requirements.

Risks Related to Litigation

Product liability and business liability suits could be brought against us due to defective design, material or workmanship or due to misuse of our products. These lawsuits could be expensive and time consuming and result in substantial damages to us and increases in our insurance rates.

If our products are defectively designed, manufactured or labeled, contain defective components or are misused, we may become subject to substantial and costly litigation by our customers or their patients or clients. Misusing our products or failing to adhere to operating guidelines for our products can cause severe burns or other significant damage to the eyes, skin or other tissue. If our products fail to function properly, we may be required to conduct product recalls and our customers may lose the ability to treat their patients or clients resulting in a loss of business for our customers. We are routinely involved in claims related to the use of our products. Product liability and business liability claims could divert management’s attention from our core business, be expensive to defend and result in sizable damage awards against us. Our current insurance coverage may not apply or may not be sufficient to cover these claims, and the coverage we have is subject to deductibles for which we are responsible. Moreover, in the future, we may not be able to obtain insurance in amount or scope sufficient to provide us with adequate coverage against potential liabilities. Any product liability or other claims brought against us, with or without merit, could increase our product liability insurance rates or prevent us from securing continuing coverage, could harm our reputation in the industry and reduce product sales. We would need to pay any losses in excess of our insurance coverage out of cash reserves, harming our financial condition and adversely affecting our operating results.

We may incur substantial expenses if our past practices are shown to have violated the Telephone Consumer Protection Act.

We previously used facsimiles to disseminate information about our clinical workshops to large numbers of customers and potential customers. These facsimiles were transmitted by third parties retained by us, and were sent to recipients whose facsimile numbers were supplied by us, as well as other recipients whose facsimile numbers we purchased from other sources. In May 2005, we stopped sending unsolicited facsimiles to customers and potential customers.

Under the federal Telephone Consumer Protection Act, or TCPA, recipients of unsolicited facsimile “advertisements” may be entitled to damages of up to $500 per facsimile for inadvertent violations and up to $1,500 per facsimile for knowing or willful violations. Recipients of unsolicited facsimile advertisements may seek enforcement of the TCPA in state courts. The TCPA also permits states to initiate a civil action in a federal district court to enforce the TCPA against a party who engages in a pattern or practice of violations of the TCPA. In addition, complaints may be filed with the Federal Communications Commission, which has the power to assess penalties against parties for violations of the TCPA.

In 2005, a plaintiff, individually and as putative representative of a purported class, filed a complaint against us under the TCPA in Massachusetts Superior Court in Middlesex County seeking monetary damages, injunctive relief, costs and attorneys’ fees. The complaint alleged that we violated the TCPA by sending unsolicited advertisements by facsimile to the plaintiff and other recipients without the prior express invitation or permission of the recipients. Based on discovery in this matter, the plaintiff alleges that approximately three million facsimiles were sent on our behalf by a third party to approximately 100,000 individuals. In January 2012, the court denied the class certification motion. In November 2012, the court issued the final judgment and awarded the plaintiff $6,000 in damages and awarded us $3,495 in costs. The plaintiff appealed this decision and oral argument on the appeal was heard in October 2013 before the Commonwealth of Massachusetts Appeals Court. In March 2014, the appeals court affirmed the lower court’s ruling, and in April 2014 plaintiff filed a request for further appellate review by the Supreme Judicial Court. On May 6, 2014, the Supreme Judicial Court issued a Notice of Denial of Application for Further Appellate Review. No further appeals are possible in

Massachusetts. In addition, in July 2012, the plaintiff filed a new purported class action, based on the same operative facts, asserting the same claims and seeking similar monetary damages, injunctive relief, costs and attorneys’ fees as in the Massachusetts action, in federal court in the Eastern District of New York. In February 2013 that court granted our motion to dismiss the plaintiff’s claims. In March 2013, the plaintiff drafted a motion seeking reconsideration of the court’s judgment and vacation of the court’s order of dismissal. In April 2013, we drafted a response opposing the plaintiff’s motion. On August 14, 2013, plaintiff filed its motion with the court, although the deadline had been April 26, 2013. We filed a letter with the court objecting to this untimely motion and requesting sanctions. On February 6, 2014, the court denied plaintiff’s motion and denied our request for sanctions. On March 6, 2014, plaintiff filed an appeal of the court’s judgment entered on March 5, 2013. On July 23, 2014, the Second Circuit notified the parties that it will not hear oral arguments and will decide the case based on the briefs. On September 16, 2015, the Second Circuit dismissed the plaintiff’s appeal. On September 30, 2015, the plaintiff filed a Petition for Rehearing with Suggestion for Rehearing En Banc. On October 27, 2015, the Second Circuit issued a corrected opinion which did not change its September 16, 2015 dismissal of the plaintiff’s appeal.

We are vigorously defending this lawsuit. However, litigation is subject to numerous uncertainties and we are unable to predict the ultimate outcome of this or any other matter. Moreover, the amount of any potential liability in connection with this lawsuit will depend, to a large extent, on whether a class in a class action lawsuit is certified and, if one is certified, on the scope of the class, neither of which we can predict at this time.

This and any future lawsuits that we may face regarding these issues could materially and adversely affect our results of operations, cash flows and financial condition, cause us to incur significant expenses and divert the attention of our management and key personnel from our business operations.

Employment related lawsuits could be brought against us for improper termination of employment, sexual harassment, hostile work environment and other claims. These lawsuits could be expensive and time consuming and result in substantial damages to us and increases in our insurance rates.

If we terminate employment for improper reasons or fail to provide an appropriate work environment or it is alleged that we did so, we may become subject to substantial and costly litigation by our former and current employees. We are routinely involved in claims related to improper termination and other claims. Such claims could divert management’s attention from our core business, be expensive to defend and result in sizable damage awards against us. Our current insurance coverage may not apply or may not be sufficient to cover these claims, and the coverage we have is subject to deductibles for which we are responsible. Moreover, in the future, we may not be able to obtain insurance in amount or scope sufficient to provide us with adequate coverage against potential liabilities. Any employment related claims brought against us, with or without merit, could increase our employment law insurance rates or prevent us from securing continuing coverage, could harm our reputation in the industry and reduce product sales. We would need to pay any losses in excess of our insurance coverage out of cash reserves, harming our financial condition and adversely affecting our operating results.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Item 6.

Exhibits


Exhibit No.		Description

31.1		Certification of the Principal Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended

31.2		Certification of the Principal Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended


Exhibit No.		Description

32.1		Certification of the Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification of the Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101		The following materials from the Cynosure, Inc. Quarterly Report on Form 10-Q for the quarter ended September 30, 2015, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Statements of Operations for the three and nine months ended September 30, 2015 and 2014, (ii) Consolidated Balance Sheets at September 30, 2015 and December 31, 2014, (iii) Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2015 and 2014, (iv) Consolidated Statements of Cash Flows for the nine months ended September 30, 2015 and 2014, and (v) Notes to Consolidated Financial Statements.

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.


	Cynosure, Inc. (Registrant)

Date: November 6, 2015		By:	/s/ MICHAEL R. DAVIN
			Michael R. Davin
			Chairman and Chief Executive Officer

Date: November 6, 2015		By:	/s/ TIMOTHY W. BAKER
			Timothy W. Baker
			President, Chief Operating Officer and Chief Financial Officer

EXHIBIT INDEX


Exhibit No.		Description

31.1		Certification of the Principal Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended

31.2		Certification of the Principal Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended

32.1		Certification of the Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification of the Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101		The following materials from the Cynosure, Inc. Quarterly Report on Form 10-Q for the quarter ended September 30, 2015, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Statements of Operations for the three and nine months ended September 30, 2015 and 2014, (ii) Consolidated Balance Sheets at September 30, 2015 and December 31, 2014, (iii) Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2015 and 2014, (iv) Consolidated Statements of Cash Flows for the nine months ended September 30, 2015 and 2014, and (v) Notes to Consolidated Financial Statements.

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company